Updated: May 19, 2022
If you're contemplating a change of scenery by way of a new home and the phrase "sticker shock" comes to mind, which wouldn't be too surprising since 2021 saw the U.S. median home price jump 16.2% with an all-time high of $374,900, you may be looking in an overpriced market.
Depending on your motivation to meander — job change, family responsibilities, retirement, etc. you may or may not have much choice regarding geography. In that case, your sticker shock may just have to gradually wear off to a state of acceptance.
If you have some wiggle room, however, it's a wise idea to do your homework and find out are the houses in the market where you're looking listed at higher prices than what they're really worth? And how does anyone even really know what a house is worth?
Here's why you need to find out if the housing market is overvalued where you're looking.
An overvalued residential real estate market could be a sign of a housing bubble, and bubbles aren't stable. If you pay too much for a house in an unstable market, it could be worth a lot less a year or two down the road. That’s fine if this is going to be your forever home, but if you go to sell after the bubble pops, you could be looking at selling for less than your purchase price.
Overpriced homes don't always equate to a housing bubble, though. High listing prices can also be a simple result of supply and demand. If there aren't just a plethora of houses to choose from in an area, the prices are simply going to be higher. Although buying a big sticker house in that situation doesn't carry the same financial risk as buying in a bubble, a potential issue could be developers responding to the demand. As more houses go up, demand goes down, and listing prices go right along with them. You could still end up upside down on it later.
How to determine whether your housing market is overpriced
First, to know if a housing market is overvalued, the actual value of homes in the area has to be estimated. How do you know how much a house is worth? Experts at NerdWallet say, "the short answer's easy: A house is worth whatever someone will pay for it." But there are other ways to look at it.
Here are a few of the steps finance gurus suggest to tackle the question of "what's this house's actual value" more in-depth:
1. Use an online valuation tool like the 22% of U.S. homeowners already doing it. They're technically called Automated Valuation Models, or AVM's, and lenders or real estate sites you work with will likely offer an AVM. Be advised, though, that through big real estate sites, AVM's can be used as marketing tools. Lenders and real estate professionals are a safer bet.
2. Check the comps in your area. DoughRoller says "comps are typically determined by comparing the property in question to other properties within a 1-mile radius, which have sold within the last year and have similar attributes." Think square footage, lot size, updates, number of rooms, etc. While you can run your own comps by researching the listings, the most accurate reports are done by real estate agents and appraisers with access to the complete MLS and know your preferences as a buyer.
3. Use the Federal Housing Financing Agency's House Price Index (HPI). The HPI has records of millions of real estate transactions from the last several decades, and uses those to analyze market value trends, ultimately to give you an estimate about your home’s value.
You know what homes are worth now; so are the listing prices reflecting those same numbers? Here's a simple strategy GOBankingRates uses to sleuth out overpriced markets:
Look at the asking price for homes versus the median home value, which Zillow, for example, bases on sale prices (the actual value determiner, in this case) at closing time. And figure the difference. If the median asking price for homes is significantly higher than the median sale price-- CoreLogic defines it as “10% above long-term, sustainable levels”— then the market is overvalued.
Know that there are many U.S. cities with overpriced housing markets right now. So, chances of you finding one of them in your home search are pretty strong. National Mortgage News counts 26 of the top 50 markets as overvalued, while only 7 are undervalued.
A few of the most overpriced cities, according to Yahoo Finance:
-The Woodlands, TX
In state-to-state comparisons, the most overvalued markets were found in Idaho Nevada, North Dakota, Arizona, Texas, and Utah.
1. If you're buying a house and it seems overly expensive, it may be in an overpriced/overvalued housing market.
2. Many U.S. housing markets are overpriced.
3. Be cautious about buying a house in an overvalued housing market. If you try to sell further down the road, the prices may be lower and you may not get a good return on your investment.
4. Do your homework. If you know it's an overpriced market and you have a little time to wait, watch the market for a while. What goes up must eventually come down.
5. You can't always control costs the way you want to, but preparation can help you make decisions.
If you're a seller in an overpriced market, go for the gold if you can, but don't be afraid to drop the listing price to move the sale. You'll still come out on top. And if you're a buyer, arm yourself with as much information as you can so you're not surprised and to give yourself a little leverage. Your dream home can be whatever you want it to be.