The Strange Story of Overvaluation

housing marketThe prices of housing markets are among the strictest and most tightly controlled economic systems in the country. But, with all the factors that people take into consideration when calculating the potential value of a property, it’s inevitable for housing values to misrepresent the market in certain situations. This phenomenon is known as over or undervaluation, and they can be tricky to deal with.

Too Much of a Good Thing

There are many ways for both of these situations to occur, and it’s quite difficult to predict when they can happen. In fact, representatives from Your Advantage Realty explain that drastic value jumps and dips most often take place as reactions to a significant event in the local economy. One of the most recent and extreme examples is Texas, as the inconsistencies in their systems are affecting several cities.

It all began when the state suddenly started experiencing one of the best oil booms in recent history; the levels of the previous year were on par with some of the highest numbers recorded in 1976. This caused a renewed housing boom in the State, as more people wanted to get a piece of the petroleum pie. The only problem is that the local economies haven’t been able to keep pace with the rise in housing prices.

Good, But not Enough

The gross metro product of Austin, for example, grew by 21% from its base value in 2011. In any other situation, this type of growth would be very healthy, and seen as a good sign for the city’s economy. But, put those numbers next to the 34% rise in housing prices in that same period, and there’ll be many economists that will start to get nervous.

Some observers will look at the data and call the event a bubble waiting to pop, but analysts closer to the situation think otherwise. According to projection models, housing prices are unlikely to go down in these markets, which is what most people expect in a bubble correction. What they think will happen is that the growth of housing prices will stagnate and level out as the oil economies start slowing down.

This is because the Texas economy has shown that it can reach the value levels that justify such property values – eventually. So, instead of cutting prices, they’ll stay at a certain range and wait for the GMP to catch up.