This just in: Supply and demand apply to real estate, just like any other good, service, or commodity. As the Old Man used to say, something is worth whatever someone is willing to pay for it.
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That’s why it’s interesting to see a claim that, in five southern states, homes are “overvalued.” In a free market, if a good, service, or commodity is overpriced — which, I’m sure, is the word they were looking for here — it won’t sell. These houses are selling, hence, not overvalued or overpriced.
An overwhelming majority of homes in the U.S. are overvalued as steep mortgage rates and an ongoing housing shortage push the price of real estate even higher.
A new report published by Fitch Ratings found that homes were overvalued by 11.1% at the end of 2023, a trend occurring in about 90% of U.S. metro areas.
But the increase in homes being sold at prices over the long-term average was noticeably higher in a handful of Southern states.
Tennessee, Arkansas and South Carolina saw the sharpest rise in overvalued homes, followed by Montana and Alabama.
That’s not what “overvalued” means. That’s the market responding to increased demand.
This isPrice Theory 101: the price of any good, service, or commodity is determined by the relationship between that item’s supply and demand at any given point. In these five states, the supply of housing is rising as quickly as the demand, so the price point is changing.
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That doesn’t mean the houses are “overvalued.” They are at market value; as evidence of this, people are paying the prices asked, the prices that this article claims are overvalued.
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The housing market, granted, is all over the place. Large portions of the population are packing up and moving, mostly from blue states to red ones — and notice that the five states mentioned are varying shades of red. Part of that is for the very reason that these price points are changing: People moving in are buying up properties with the proceeds of their house sales in much more expensive markets (precisely what happened to my wife and I when we sold our house in the Denver ‘burbs and bought one in Alaska.)
And, yes, part of the reason for that migration is due to the deterioration of our major cities.
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There are things that some of the various levels of government can do to help bring real estate prices down, but none of them have to do with meddling with pricing in the form of price controls. The key here is on the supply side: To bring prices down, increase supply. Encourage development. Ease restrictions on land development. Reduce or remove zoning restrictions. Many Asian cities, including one in which I have spent a fair amount of time — Tokyo — deal with housing costs by developing vertically. Any or all of these will help bring housing costs down without the necessity of the heavy hand of government interfering directly with the free market by attempting to mess with prices.
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The Fox Business article linked above concludes:
“Market conditions for homebuyers remain challenging with few homes listed and costs for ownership still climbing,” said Ben Ayers, Nationwide senior economist. “Despite strong fundamentals for demand from demographics and a strong labor market, many first-time buyers are being shut out of the market by elevated financing rates and rising prices.”
Interest rates will likely remain where they are or nudge a bit higher; it’s the primary monetary policy method of trying to bring inflation under control, and if the Biden administration has been marked by anything, it’s been inflation. But look at that claim: “Few homes listed.” That’s a supply problem. That’s why these homes are valued — not overvalued — the way they are; that’s why people are paying these prices, and that’s why the way to deal with that is to remove roadblocks in the way of increasing the supply of available homes.