The U.S. Housing Market Is Becoming Overvalued In 2021

It’s still shocking to think that home prices in the United States have risen by double digits over the past year. Not even a global pandemic and nationwide economic slowdown could halt that trend.

As a result of this rapid rise in prices, many are now wondering if the U.S. housing market is becoming overvalued.

According to a recent report, home prices across the United States are overvalued in many parts of the country. That report came from the credit rating agency Fitch Ratings.

At the state level, Idaho was ranked as the most overvalued housing market in the U.S. Las Vegas, Dallas and Phoenix were singled out at the metropolitan level. Home prices have risen sharply in all of these areas, over the past year or so.

Report: U.S. Housing Market Overvalued by 8.2%

In April, Fitch Ratings published a report that suggested the U.S. housing market has become overvalued due to significant home-price gains. To quote their April 2021 report:

National home prices rose by over 10% last year, the highest annual growth in over six years, and are now overvalued by 8.2% on a population-weighted average basis, according to estimates by Fitch Ratings. 

But like all things real estate-related, such conditions can vary greatly from one city or region to the next. In one-third of U.S. metropolitan areas, housing markets were said to be overvalued by 10% or more. According to the report, this is the result of home-price growth outpacing “underlying economic fundamentals” such as income growth.

According to Fitch, Idaho currently has the most overvalued real estate market of any U.S. state. The company reported that home prices in Idaho are some 30% to 34% overvalued, as of spring 2021. The state of Nevada took the number-two position, having a real estate market that is estimated to be 25% to 29% overvalued.

Arizona and Texas were also reported to have overvalued home prices, both by 15% – 19%.

At the metropolitan level, Las Vegas, Dallas-Fort Worth, and Phoenix currently have the “frothiest” housing markets in the country, according to the report. (It’s worth mentioning here that both Phoenix and Las Vegas were hit especially hard during the last housing boom-and-bust cycle.)

But Don’t Expect a Major “Crash” Anytime Soon

This isn’t the first time the U.S. real estate market was considered to be overvalued. We saw this back in the mid 2000s as well, just before the nationwide housing market collapse.

But things are different this time around. During the last housing bubble, many metro areas experienced a surge in new home construction. This was largely fueled by speculation, along with ridiculously lax mortgage-lending standards.

Today, however, there is a serious and ongoing shortage of homes for sale across the U.S. Instead of having too many houses on the market, we currently have a situation where the number of available properties falls well below the demand from buyers. This is the number-one reason why prices have risen so sharply over the past year or two.

While some housing markets across the U.S. might be overvalued in 2021, that doesn’t necessarily mean a crash is imminent. In fact, the ongoing imbalance between supply and demand will continue to put upward pressure on prices for the foreseeable future.

But there might be some long-term concerns from a home-buying, especially in the states and metros mentioned above. If the real estate market continues to become more and more overvalued, we could see a correction in the form of leveling or declining home prices. But a full-on “crash” scenario seems unlikely at this stage.

Above-Average Home Price Gains in 2021

According to the economic research team at Zillow, the median home value in the United States rose by around 13.2% over the past year. This was reported in June of 2021. Looking forward, the company predicts that prices will rise by double digits over the next year as well.

This is an abnormal rate of home-price appreciation, from a historical standpoint. If you look back over the last 40 years or so (and remove the anomaly from the last housing bubble), you’ll find that home prices in the U.S. tend to rise by around 4% annually. That’s well below the 13.2% annual increase reported by Zillow.

Related: Will home prices drop in 2022?

What This All Means for Buyers

These and other reports about the housing market being overvalued might cause home buyers to think twice about their purchasing plans.

The biggest concern has to do with equity loss. Many buyers worry that they will overpay for a home, only to see prices drop over the next few years. This can lead to a scenario where the homeowner becomes “upside down” or underwater in the mortgage loan — something we saw a lot of during the last housing bust.

Unfortunately, no one can predict future real estate or economic trends with complete accuracy. Home buyers simply have to research current housing market trends in their area, and make an informed decision.

It also helps to think long term, when buying a home. More often than not, houses tend to gain value over the long term. (Take a look at this chart and see for yourself.) That’s what makes real estate one of the best investments over the long haul.