In March, researchers at the Federal Reserve Bank of Dallas warned that a housing bubble was on the horizon in the U.S. Now, one real estate expert believes Austin leads the country’s on-the-bubble housing markets, which could be a deflating development for homeowners.
A housing bubble “occurs when the price of housing rises at a rapid pace, driven by an increase in demand, limited supply and emotional buying,” according to Bankrate. “Once speculators recognize that housing prices are on the rise, they enter the market, further driving up demand. The phenomenon is called a bubble because at some point it will burst.”
Why is the bursting of a housing bubble — also known as a housing “correction” — something to worry about?
“The concern of a bubble bursting is when — and how quickly — the market rebalances. An abrupt shift could result in turmoil. For example, if prices see a sudden sharp decline, many people who recently bought a place could suddenly be paying for a mortgage that is worth more than their house,” according to the Insider news website.
Insider recently asked Nicholas Gerli, CEO of real estate data analytics company Reventure Consulting, to compile a list of the U.S. metro areas where housing bubbles are prepared to pop. For his analysis, Gerli looked at data about growth in mortgage payments and property taxes from April 2000 to April 2022.
Based on that measure, Gerli identified Austin as experiencing the country’s highest two-year growth in annual housing costs, at 93.5 percent. That far outpaced Austin’s wage and rent growth (7 percent and 24 percent, respectively) during the same period. Those figures suggest Austin’s housing market is now in a bubble, he says.
“When there’s … a deviation in home prices above inflation and wages, that’s historically the sign of a bubble,” Gerli tells Insider.
While home sales activity in the Austin area has tapered off recently, prices are still climbing. In April, the median price of a home in the Austin area surged 19.6 percent compared with a year earlier to an all-time record of $550,000.
“The ups and downs we are seeing in our market are normal, and somewhat expected considering the fast pace at which our market has moved over the past two years,” Cord Shiflet, president of the Austin Board of Realtors, said in a May news release.
Austin is the only Texas metro in Gerli’s top 15. Behind Austin on his list are Boise, Idaho, and North Port, Florida.
A study released in May by researchers at Florida Atlantic University and Florida International University places Boise and Austin among the four U.S. housing markets that are overvalued by more than 60 percent. According to the study, the typical buyer in first-ranked Boise is paying 72.6 percent more than they should be for a home. For second-ranked Austin, that figure is 67.7 percent.
“If we’re not at the peak of the current housing cycle, we’re awfully close,” Ken Johnson, an economist at Florida Atlantic’s business school, says in a news release. “Recent buyers in many of [the 15 most overvalued] cities may have to endure stagnant or falling home values while the market settles — and that’s not what they want to hear if they had planned to resell anytime soon.”