I Wouldn’t Dare To Buy Real Estate In These 3 Incredibly Overvalued Markets
OOver the past two years, the national median home price has increased 34%, more than four times the growth rate from 2018 to 2020. Many real estate markets have seen home prices increase at even higher rates during this period. Tampa, Florida, for example, saw home prices rise 49%, while home prices in Austin, Texas soared 59%. With such rapid growth in house prices, it is not surprising to learn that many real estate markets are overvalued and leave homeowners and investors at risk in the event of a downturn.
Buying real estate in an overvalued market may make sense if long-term demand and a lack of new homes or space for new homes is the primary driver of price growth. But this is not the case for many overvalued markets. This is precisely why I would not dare to buy real estate in these three markets.
Miami, Florida is a hotspot for tourism, international investment and institutional investors. Its tropical climate, gorgeous beaches, proximity to other countries, vibrant nightlife, and diverse neighborhoods have made it a popular place to work and live for decades. But over the past two years, the town has seen an increasing number of residents move in. According red finMiami was the top relocation city for the second consecutive quarter, with the majority of residents coming from New York.
Internal migration is a good thing – it means there is more demand for things like housing, restaurants, retail and other real estate. But Miami also faces many challenges, including the effects of environmental challenges such as flooding that put the city’s future in question. It is also the least affordable housing market in the United States, which makes it difficult to generate a good return on investment.
Finally, Miami’s housing market has historically been known to be well supplied, especially for condos and high-end luxury homes, both of which are showing signs of slowing as mortgage rates rise. I think today’s market tightening will be short-lived as less buying will increase supply again.
Boise, Idaho has been among the top five fastest growing real estate markets for several years in a row. It’s one of the hottest, otherwise the the hottest real estate markets in the United States as residents of Western cities move to the rapidly growing region. According to a study by the Florida Atlantic College of Business, Boise, Idaho is the most overvalued city in the United States, with estimates showing that current values are 72% higher than the expected price.
The average price of a home in the city is $535,000, while the average rental rate is $1,500 – not that high if your goal is to own a rental property. There is talk of Boise housing prices peaking, but I’m not so sure. There is a lot of capital being invested in the market and incentives to attract high net worth individuals, and the ongoing pandemic has only motivated many higher tax states like California to make the move. Still, the demand he’s seeing today doesn’t necessarily mean it’s a great place to invest.
Austin, Texas is quickly making a name for itself as one of the coolest new cities to live. It is the fastest growing city in Texas, with an increase of almost 21% in the number of inhabitants between 2010 and 2020. The greater metropolitan area surrounding Austin is expected to reach the 3 million mark. inhabitants by the end of the next decade. Like Boise, I think the current demand for housing in Austin is warranted. There are good job opportunities, especially as more companies expand their operations or move their headquarters to town, and an insufficient supply of housing.
But investor attention in the market, much like the city of Boise, has driven prices higher as people try to score a slice of what could very well be America’s next big city. According to Redfin, the competition is fierce with a ranking of 75 out of 100, and it is the second most overvalued market according to the Florida Atlantic study, with its values up to 67% higher than expected.
what i would buy
In the case of these three markets, I prefer to invest my money in a more affordable market with less competition that can generate better returns. While I personally won’t buy real estate in these cities, that doesn’t mean I wouldn’t invest in a real estate investment trust (REIT) that invests there. In fact, buying shares of a REIT with exposure to these markets is one of the best ways to take advantage of high demand while minimizing my exposure to risk.
REITs have much better buying margins, thanks to things like massive amounts of cash, economies of scale, and a lower cost of capital, which can improve returns on high-quality real estate that I personally could never buy. Overvalued markets are risky, but that doesn’t mean they are indifferent.
10 stocks we like better than Walmart
When our award-winning team of analysts have investment advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now…and Walmart wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
View all 10 stocks
Equity Advisor Returns 2/14/21
Liz Brumer-Smith has no position in the stocks mentioned. The Motley Fool fills positions and recommends Redfin. The Motley Fool recommends the following options: $22 May 2022 Long Calls on Redfin, $26 May 2022 Short Calls on Redfin, and $28 May 2022 Short Calls on Redfin. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.