I bet that in the next three years you will see the following statement, or somethingSimilar: "No one would have seen it coming. Investors knew there was risk in equities due to continued record low interest rates, leading many investors to flee to real estate, which they viewed as a safe investment since the subprime mortgage was issued. "
The reason most people don't see it is because real estate is not in a traditional bubble where prices are extreme across the board. Instead, we have a very different and more unique situation in which some properties are undervalued, while others are even more overvalued than they were before the subprime mortgage crisis. (For more information, see: Hedge funds + real estate: could it create another bubble? )
Top 10 Overvalued Markets
You probably want to know which markets are the most overvalued, so you know if you are in a danger zone. The information below is based on research from CoreLogic – a company that provides financial, real estate and consumer information, analytics and business intelligence. According to CoreLogic, here are the 10 most overvalued U.S. markets in the first half of the year, as well as their percentages above affordability levels based on housing values versus local per capita income:
1. Austin, Texas: 42. 3%
3. Charleston, S.C.: 23,4%
5. Washington, D.C.: 19%
6. Knoxville, Tennessee: 12. 3%
7. Philadelphia: 14. 3%
9. San Antonio: 12. 4%
10. Nashville, Tenn.: 12. 3%
As you can see, Texas is a common theme, and with the energy sector – many of which are based in Texas – likely to suffer more due to deflationary trends, the divergence between prices and incomes is unlikely to improve in the near future. The only possible outcome is that real estate prices will eventually fall back to realistic levels once all cash investors leave the scene. It should also be noted that commercial real estate is now valued 13% higher than before the crisis.
This is a problem in many large cities. According to the Commerce Department, U.S. disposable personal income rose 0.4% in October, down from 0.2% in September. According to RealtyTrac, U.S. real estate prices have risen 11.5% in the last two years. When housing prices rise much faster than personal income, it leads to a bad future situation. Keep in mind, however, that outbidding markets – as opposed to all real estate markets – are driving home price appreciation in the U.S.There are still places to find bargains. (For related reading, see: 7 tips for buying a home in a down market .)
Real estate overvaluation is not just a problem in the U.S. of the world. According to UBS Group AG (UBSUBS Group Inc. 17.07 + 0.12% Created with Highstock 4. 2. 6 ) real estate is overvalued in all European countries. While low interest rates have played a role here, much of the demand has been driven by foreign investors looking for bargains in the wake of the subprime mortgage crisis.
In Europe, much of the demand was driven by the ECB's loose monetary policy. The most overvalued markets are in London and Hong Kong. Both appealed to many European investors looking for safety because they are not as geopolitically vulnerable.
The Bottom Line
It's not easy to find bargains in real estate these days, but they're out there. Domestically, the key to success is to look for cities with growing populations and without many foreign and/or cash investors who have raised prices to absurd levels. Bargains can be found in France, Greece and Italy. The best approach right now is probably to avoid real estate and then get good deals after the artificial Fed rally ends and the economy starts growing organically again. This will take years, and your best chances along the way will probably be here and in China. (For related reading, see: 12 steps to closing a real estate deal .)