OREANDA-NEWS. April 07, 2016. Texas homes are now overvalued by 10%-15% on average, Fitch Ratings says. For the last two years, home prices in the state's two largest cities, Houston and Dallas, grew faster than incomes. Smaller cities, such as Midland, also face risk from their economic dependence on natural resources and the decline in the price of oil.

Fitch's "U.S. RMBS Sustainable Home Price Report," published in February, indicated that Dallas became overvalued in 2014, while Houston began in 2013. Dallas and Houston have seen 42 and 54 months of consecutive price growth, respectively. And, over just the past two years, Dallas home prices grew 10%, outpacing income growth by 3.3%.

In some Texas cities, the risk of the overvaluation is amplified by the decline in energy prices. Since recovering in late January, the price of oil was mostly in the \\$30-\\$40 range. This pushed down drilling activity in Texas. The Baker Hughes rig count dropped to 227 in March, down 42% from 538 a year ago and down 75% from November 2014. While Fitch's Sustainable Home Price Model measures point in time valuation, any decline in income or increase in unemployment would diminish sustainable prices.

We see the potential for the biggest impact of the oil price decline in cities, such as Midland, where 40% of wages come directly from the natural resources industry. The risk is more muted in Houston where oil and gas make up only 10% of income. Dallas is well diversified around the private sector, outside of natural resources.

Fitch views current home price levels in most US regions as sustainable and supported by improving unemployment and income growth.