Is This a Housing Bubble?

Is there a price bubble in today’s exceptional housing market?

Luis Torres, research economist with the Texas Real Estate Research Center, discussed the topic in a post to the center’s Mixed-Use blog earlier this year.

The traits that defined the 2006-07 housing bubble are not prevalent today, he wrote. Those include looser lending standards, lax oversight, and exuberant speculation. That said, there may be a misalignment between estimated and actual prices in Texas markets.

Torres cited the Case-Shiller methodology, one of the first to point out the formation of a housing bubble in the U.S. housing market. The methodology compares the Federal Housing Finance Agency’s estimated housing price index to the actual price index FHFA applied to Texas and its major metros.

“If actual prices are higher/lower than the estimated price, then prices are growing at a higher/lower rate than what is explained by fundamentals, indicating possible issues in the housing market,” Torres wrote. “In the long run, overvalued/undervalued home prices should revert toward fundamentals, eliminating any differences between them.”

Price differences continued to increase and accelerated during the pandemic in Texas, Austin, and Dallas-Fort Worth, indicating a possible misalignment. Price differences increased in San Antonio toward the end of 2020, suggesting the same thing. Meanwhile, Houston’s difference continued to decrease, moving more in tandem with fundamentals.

Torres wrote that rising mortgage rates and rapid price increases should slow demand and bring price growth to more sustainable levels.

“There is no sure way of knowing what prices ‘should be,’ even when considering supply and demand determinants, since they change over time. The Texas Real Estate Research Center continues to monitor the data and will issue updates as necessary.”

Read the blog post.