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Texas economy continues to expand, home prices may be overvalued, says Dallas Fed

For Immediate Release: May 5, 2017

DALLAS—The Texas economy is expanding at a moderate pace, but home prices may be overheating, said Federal Reserve Bank of Dallas economist Anil Kumar in the latest Texas Economic Update video.

Texas employment rose at a 1.5 percent annual rate in March, stronger than February’s 0.2 percent increase. While state job growth moderated slightly in the first quarter from the two previous quarters, at 2.4 percent it remained higher than the nation’s 1.5 percent increase as well as the state’s long-term average.

Job growth in the goods-producing sector showed particular strength, including strong gains in the energy, manufacturing and construction sectors fueled by improvements in the oil and gas sector.

“The fact that energy has been recovering is not surprising because oil prices have stabilized—they are fluctuating around $50 a barrel,” Kumar said. “In fact, energy added jobs at a 17 percent annual rate in the first quarter, and this recovery in energy has also helped the rebound in manufacturing.”

House prices continue to rise in Texas, and an examination of the data suggests that homes may be overvalued relative to key economic fundamentals, according to Kumar.

“Texas house prices have been growing faster than the nation and we have seen strong house price increases in the last few years,” he said. “That has given rise to concerns of home affordability and overheated housing markets.”

Comparing actual Texas home prices with a predicted value based on a model derived from key variables that typically determine home values suggests that the recent run-up in Texas house prices cannot be explained by economic fundamentals alone, Kumar said.

“That leads us to think that Texas house prices may be slightly overvalued,” he said. “Now that doesn’t mean that we are going to see a decline in house prices in the near term. Housing supply still remains a constraint. What we may see is some deceleration in house price growth going forward.”

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Media contact:
Alex Johnson
Federal Reserve Bank of Dallas
Phone: (214) 922-5288
E-mail: alexander.johnson@dal.frb.org