Home prices keep rising—and not just in some markets. For the first time since 2005, each of the country’s 50 most populous cities are seeing higher prices. While that could be a good sign for the economy, the market is showing signs of overheating and the current pace is not sustainable, according to a new report by Fitch Ratings.
The report regards home prices across the country as overvalued by about 17 percent. Conditions are worrisome in several markets, most of them in coastal California, where homes are more than 20 percent overvalued. San Francisco and San Jose will set new home price records in the next six months, according to Fitch. While Bay Area tech companies are booming, the region’s economy isn’t growing nearly as fast as the “unprecedented” home price gains, making the market nearly 30 percent overvalued. Current conditions in the heart of Silicon Valley are akin to “the environment in 2003,” the report notes ominously, “three years into the formation of the previous home price bubble.”
Prices are being driven by investor interest in flipping homes, another familiar phenomenon. Fitch estimates that half of all homes in the Bay Area are now bought with cash, Fitch says, and that’s “often indicative of investor behavior.”
The danger is that overvalued markets could stall if interest rates rise as the economy rebounds: “When an expectation of rising rates is coupled with rising price levels,” the report notes, “there could be increased pressure on the housing market that could reverse recent gains.” That echoes an argument that Zillow’s chief economist, Stan Humphries, made in April, when he said that low rates were acting like a “carnival funhouse mirror” that distorts reality. Cheap mortgages, he said, made home appear affordable when in fact, they were overvalued relative to what people are earning.
Rents are not climbing nearly as fast as purchase prices. It may be time to revisit a trusty ol’ rent vs. own calculator to see whether renting or owning makes more sense.