The last housing bubble missed Texas. Now the Lone Star State is home to the second most ‘overvalued’ housing market in the country

Back in the early 2000s, housing speculators got suckered into believing that a shortage of supply would continue to propel U.S. home prices skyward, at a double-digit pace. Those investors, who were often home flippers, assumed the best bang for their buck would be in fast-growing Sunbelt cities—and that rush of investment meant places like Las Vegas and Miami got crushed even harder when what turned out to be a housing bubble ultimately burst and spurred the 2008 financial crisis.

The Sunbelt housing meltdown had one big exception: Texas.

While zealous lenders across the nation were allowing borrowers to take on mortgages while putting little to nothing down, Texas stuck with its conservative lending practices. That hard line helped the state escape the sharp 2008 home price correction and subsequent foreclosure crisis that plagued Sunbelt markets like Phoenix and Tampa after the crash.

Fast-forward to today, and the U.S. is once again amid a housing boom that has set home prices out of reach for many buyers. U.S. home prices have risen 19.8% over the past year, which is more than four times greater than income growth during the same period. But this time around Texas is front and center of the surging cost in housing.

Each month, researchers at Florida Atlantic University calculate how “overpriced” or “underpriced” home prices are in America’s 100 largest housing markets, as measured against the local market’s “historical implied price.” Their latest reading, which uses March data, doesn’t look great for Texas.

Among the regional housing markets Florida Atlantic University measured, Austin is the second most overvalued housing market in the nation. The median home in Austin is worth $589,600. That’s 66% above the $354,600 limit that the Florida Atlantic University researchers say is supported by underlying economic fundamentals. Only Boise, Idaho, was overvalued by more, at 75%.

But in Texas, it isn't just Austin where home prices are scorching.

According to the Florida Atlantic University researchers, Dallas is overvalued by 46%, ranking it No. 18 in the nation. Not too far behind are San Antonio (overvalued by 30%) and Houston (overvalued by 28%). So what's going on?

The Lone Star State has greatly benefited from pandemic-spurred work-from-home migration. Californians, who are looking for warm weather but at a lower cost of living, appear particularly drawn to Texas. Fortune 500 companies like Hewlett Packard Enterprise, Oracle, and Tesla relocated their headquarters from the Golden State to the Lone Star State during the pandemic, too, perhaps drawn by Texas's favorable tax rates.

Those newcomers only added fire to an already hot Texas housing market.

Just two years ago, Florida Atlantic University rated Austin and Dallas as overvalued by only 4% and 10% respectively. The dramatic price inflation since then speaks to the unprecedented nature of the ongoing housing boom. The heated Texan markets also have more folks in the real estate industry particularly concerned about Austin.

Florida Atlantic University's latest reading for Austin, which finds it overvalued by 66%, places the state in the same bracket as the university's March 2007 reading for Sunbelt markets like Phoenix (59%), Las Vegas (72%), and Miami (76%). That's not exactly good company.

It isn't just Florida Atlantic University researchers who've found the Texas housing market is getting out of whack. Fortune recently asked Moody's Analytics for its proprietary analysis of U.S. housing markets. The firm aimed to find out whether local income levels could support local home prices. The finding? Of the 392 metropolitan statistical areas it measured, 149 are overvalued by at least 25%. That includes Austin (overvalued by 41%), Dallas (33%), Houston (28%), and San Antonio (25%).

But Moody's Analytics chief economist Mark Zandi says we're not living in Housing Bubble 2.0 just yet. In order to get the housing bubble label, the market would need to experience both home price overvaluation and speculation in the market.

While the market is "overvalued" by historical measures, Zandi says, this isn't a FOMO-driven bubble like the early 2000s housing market. Additionally, we aren't in a subprime lending bonanza. While the Dallas Fed finds the U.S. housing market has become detached from economic fundamentals, the split isn't underpinned by shady mortgages. If a price correction does come, the Dallas Fed says it won't be as painful as the one during the 2008 era.

Where do we go next? Zandi predicts that spiking mortgage rates will see more home shoppers get priced out and should cool down the housing market. On the price front, he expects nationwide home price growth to go flat over the coming year while extremely "overvalued" housing markets, like Austin and Boise, could see 5% to 10% price corrections.

Being listed among the nation's most overvalued housing markets in 2022 is a stark contrast from Texas' position during the last housing boom. Leading up to the 2008 crisis, housing markets in Texas were barely priced above fundamentals. In March 2007, home prices in Dallas and Houston were only 3% and 5%, respectively, above what Florida Atlantic University's model says fundamentals at the time supported. Meanwhile, Austin home prices in 2007 were actually undervalued by 0.5% according to the Florida Atlantic University model.

But if a storm once again hits the U.S. housing market, it'd be hard to imagine Texas escaping it so unscathed. This time around the Lone Star State certainly won't have home affordability as its saving grace.

If you’re hungry for more housing data, follow me on Twitter at @NewsLambert.

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