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Strong Demand for Homes Bolsters Prices, Forcing Buyers to Overpay

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Home prices in the overwhelming majority of the nation’s largest housing markets continue to rise despite the Federal Reserve’s move to raise mortgage rates in hopes of curtailing runaway demand, according to researchers at 91���� and .

In 99 of the 100 markets surveyed, rising prices are forcing buyers to pay higher premiums – the amount of money above what they should be spending based on past pricing trends. The larger the premium, the more overvalued a market is. 

The only area in which the premium fell in March was Boise, Idaho, but Boise remains the nation’s most overvalued housing market by a wide margin. Its premium dipped to 75.18 percent from 76.39 percent in February, although Boise still is far ahead of No. 2 Austin, Texas, where buyers are paying 66.29 percent above the long-term pricing trend.

The average rate on 30-year mortgages hit 5.28 percent last week, the highest level in 12 years, according to a survey of large lenders by consumer website Bankrate.com. So far, at least, the increase hasn’t quelled demand. In recent years, historically low rates in the 2 percent range fueled widespread interest from buyers that caused a shortage of units and helped usher in an overheated market across the country.

“The remarkable demand for homes has put today’s buyers at a major disadvantage,” said , Ph.D., an economist in 91����’s . “Just to have an offer accepted, buyers have to outbid a host of other competitors, but that means they’re wildly overpaying in many areas. When the music stops, and it will, it could be a long time before recent buyers will be able to turn around and resell the home for an acceptable profit.”

, Ph.D., of doesn’t expect a housing downturn to be as painful as the one that led to the Great Recession from 2007-2009, when some homes lost more than half of their values.

“At the peak of the last housing cycle, we had an oversupply of housing units around the country,” Beracha said. “So when prices began to fall, there was nothing to catch them, and we witnessed a monumental crash. The current shortage of homes for sale will help put a floor under just how far prices can fall this time around.”

Ogden, Utah, as well as Las Vegas and Atlanta are the next most overvalued markets after Boise and Austin, according to the researchers.

While no Florida metropolitan area is in the top 10, eight markets in the Sunshine State are among the top third of the rankings. Fast-rising Fort Myers has moved to No. 11, with buyers there paying 50.80 percent more than they should, based on historical pricing trends.

The full rankings with interactive graphics can be found .

Each month, Johnson and Beracha rank the most overvalued housing markets of America’s 100 largest metros, similar to the popular . The researchers’ data covers single-family homes, townhomes, condominiums and co-ops.

The rankings do not consider how expensive a market traditionally is. The two high-cost housing markets of New York and San Francisco, for example, are among the least overvalued in the country because homes in those two metros still are selling relatively close to where they should be, based on historical trends.

When the housing market eventually fades, metro areas with minimal to no growth in population could see dramatic price declines despite inventory shortages, Johnson said. Metros with limited prospects for population growth, such as Memphis and Detroit, will be particularly exposed, he added.

Areas in Florida and Texas with both inventory shortages and increases in population will be at far less risk to price declines, but with that comes a prolonged period of unaffordable housing.

“Essentially, you have to pick your poison,” Johnson said. “Is it better for you to live in an area with major price declines so housing is more affordable again or in an area with modest or very small price declines that keep homes out of reach for many middle-class Americans?”

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