Are Home Prices Overvalued Now?

Q: Home prices in my area are crazy.  Do you think home prices overvalued now? Kenny, San Jose, CA.

A: In your city, San Jose’, Kenny home prices have risen faster than I have ever seen in the 18 years I’ve been doing real estate (80% in 5 years!) Home prices at any point in time reflect current demand, so the run up on prices in silicon valley where you are and in Seattle are largely the result of the tech boom. In your area and in other tech boom areas, the big risk to home values occurs if and when the tech sector takes a nosedive.

More generally, the share of cities with overvalued housing markets now is half of what it was at the peak of the last housing bubble–but that was not just a housing bubble, it was also the result of a credit bubble. There are other significant differences between where things are now and where they were during the mid 2,000s bubble: there are far fewer people with adjustable rate mortgage, most have fixed-rate mortgages. Also, the economy is much healthier now and loan underwriting has been tighter than it was during the last real estate bubble.

Ultimately, the 2 Big “I”s determine housing prices: Inventory (supply and demand) & Income (jobs). Home prices will continue to climb so long as people can afford to maintain the houses they’ve bought and so long as there are enough buyers with sufficient financial wherewithal to continue to buy.

Thanks for your question, Kenny. For more real estate information and tips visit my blog at geraldlucas.com.