Are Huntsville, Alabama Homes Overvalued?
There has been a lot of hype and clickbait articles predicting what will happen in the housing market not only nationally, but locally as well. The latest clickbait article that came across my desk was titled “Housing Correction Coming to Alabama: See the State's Most Overvalued Real Estate Market”.
They made two points in the article:
1) Home prices have outpaced income growth and
2) Huntsville is at the top of the state's list at 37.12% overvalued compared to the area's income levels.
Are Huntsville homes overvalued and is a housing correction coming to the market? Let’s look at the facts:
Rising Cost of Living
Overvalued is probably not the right term, higher cost of living is actually more accurate in this situation. When you compare two different cities, it's very similar to what you would call a price-to-earnings ratio for stocks. You're going to pay a higher price-to-earnings ratio on a growth stock versus a stock that's declining in value.
The same thing goes for cities as well. Since Huntsville is now becoming that growth stock, unfortunately, we're going to have to continue to pay higher pricing for houses because it’s a great place to live in. We’re the number one city to live in the US, we have great entertainment venues, desirable school systems, plenty of recreational opportunities, and a strong job market; with all of that comes a higher cost of housing.
Factors Affecting Home Valuation
There are several other factors that are affecting home valuations, not only in Huntsville but across the US. One of those factors is all the money that's being printed in our economy. We haven't had so much home appreciation as we've had dollar devaluation. In the above video at 1:25, take a look at the chart that plots both the number of dollars in the market versus home values across the US. You'll see that there was a vast difference back in 2008 between home values and money supply in the market, which caused that housing market crash. Whereas in today's market, 2022, both home values and money supply are actually lining up.
Another thing that's affecting home valuations right now is supply and demand. First, we have a 5.5 million home deficit in this country that’s not going away anytime soon. Second, Redfin recently reported that new listings are down 18% which is the biggest decline since May of 2020. The reason that listings are down is likely due to the increase in interest rates, there are going to be fewer sellers willing to sell their homes when they have a 3% rate locked in whereas buying a new home is going to be at around a 6% plus rate.
Should We Expect a Housing Crash?
Redfin recently reported that 24% of homes went under contract within one week, and 35% of those homes sold above list price with an average listed sales ratio of 99.7% of all listings. The reason that is important is I survived the last housing crash that we had in 2008, it’s the only housing crash that we've had in the last century, in 2008 we did not have a 99.7% list to sales ratio and homes were not selling within one week back in that timeframe. This just shows that we are not in a housing crash, which is what this article's leading us to believe.
Let's take a look at what the smart money is predicting. Goldman Sachs is predicting that home values will continue to appreciate in 2022 into early 2023 before beginning to flatten out. They will likely flatten out over the next year, but they are not predicted to decrease nationwide. So in conclusion, don't believe all the hype and the clickbait. Home values are likely to start to level off in 2023 and over the next 12 months but it's unlikely we see anything close to what we saw back in 2008 with home values crashing.
Posted by Matt Curtis on