These housing markets are the most exposed to the risk of falling house prices

Homebuyers had had enough. Soaring mortgage rates on top of record house price appreciation — up 42% since the start of the pandemic — have pushed monthly mortgage payments to levels simply unattainable for tens of millions of potential buyers. As more buyers take a rain check, the housing market correction is only intensifying.

This week we learned that year-over-year, mortgage purchase requests are down 18%. While new home sales are down 17%, and single-family home starts are down 16%.

Even though real estate transactions are collapsing, we still haven’t returned to a balanced market. Inventory levels remain at a staggering 49% below July 2019 levels, giving most sellers, at least for now, enough leverage not to sell below hit market prices any longer. early this year. That said, as inventory levels continue to rise, it is possible that some regional real estate markets will actually see year-over-year declines in house prices in 2023.

On Friday, Redfin released its “risk score”, which identifies the housing markets most at risk of a “housing downturn”. The higher a market’s ‘risk score’, the greater the likelihood that the market could see a year-over-year decline in property prices. In total, Redfin looked at 98 regional property markets and assessed factors such as house price volatility, average debt-to-income ratio and house price growth.

See this interactive chart on Fortune.com

Of the 98 markets measured by Redfin, Riverside had the highest likelihood of seeing a “housing slowdown”. It was followed by Boise, Cape Coral, North Port, Las Vegas, Sacramento, Bakersfield, Phoenix, Tampa and Tucson.

“Popular migration destinations where home prices have soared during the pandemic – including Boise, Phoenix and Tampa – are most likely to see the effects of a housing downturn amplify and house prices homes will fall year-on-year if the economy slips into a recession, a scenario that some economists say seems likely as inflation persists and stock markets stumble.Homeowners in these areas who plan to sell may want to quickly list their homes to avoid a potential price drop,” write the Redfin researchers.

The story continues

Which sellers are least likely to see prices fall? Redfin says Akron. Not too far behind are markets like Philadelphia, El Paso, Cleveland and Cincinnati. As the pandemic housing boom took off, landlords in these places saw less investor activity and more modest levels of house price growth. Amid the boom, landlords in places like Akron surely had FOMO as they watched their peers in Austin and Boise experience exorbitant levels of house price growth. But now, owners of markets like Akron and Cleveland are probably grateful: Historically, the strongest real estate corrections tend to come in the fastest growing markets.

“Relatively affordable northern metro areas – several of them in the Rust Belt, such as Cleveland and Buffalo – are the most resilient in a recession. Potential buyers in these areas can move forward with the certainty that ‘they are less likely to see home values ​​decline,’ write the Redfin researchers.

See this interactive chart on Fortune.com

Each quarter, Moody’s Analytics calculates an “overvalued” or “undervalued” figure for approximately 400 markets. The firm aims to determine whether fundamentals, including local income levels, could support local home prices. It’s only troubling when a housing market becomes significantly “overvalued.” The bad news? In the first quarter of 2006, the median US housing market was “overvalued” by 14.5%. In the first quarter of 2022, Moody’s estimates that the median regional real estate market was “overvalued” by 23%.

Simply being detached from underlying economic fundamentals does not guarantee that a market will see house prices fall. However, as a market becomes significantly “overvalued”, it increases the risks of falling house prices in the event of a housing correction and recession. Moody’s Chief Economist Mark Zandi says Fortune that real estate markets “overvalued” by more than 25% should experience a decline in house prices of 5% to 10%. If a recession hits, price drops could reach 15-20% in these markets.

Already we are seeing “bubbly” markets like Boise and Austin seeing the fastest corrections. Just look at the inventory. Over the past six months, inventory levels have climbed 161% and 220% in Boise and Austin, respectively.

See this interactive chart on Fortune.com

Earlier this month, John Burns Real Estate Consulting said Fortune that Boise is poised to be the first housing market to post a year-over-year price decline. The real estate research firm predicts that could happen as early as December. For that to happen, home prices in Boise would not only have to erase all of their spring 2022 gains, but also fall below their December 2021 price.

“You could argue that in many real estate markets, the last 10% of house price appreciation was purely ambitious and irrational, and that will ripple through very quickly,” said Rick Palacios Jr., head of the research at John. Burns Real Estate Consulting “That’s exactly what we’re all seeing right now.”

Want to stay up to date on housing correction? Follow me on Twitter at @NewsLambert.

This story was originally featured on Fortune.com