40 overvalued real estate markets that could see a 15-20% drop in house prices during a recession
A real estate bubble requires both a rush of speculators entering the market and “overvalued” real estate prices. Oh, and the bust at the end, of course.
Unlike the housing bubble that burst in 2008, the pandemic housing boom is not being supported by a speculative frenzy, said Moody’s Analytics chief economist Mark Zandi. While home flipping has certainly increased during the pandemic, he says, we don’t see the exuberance of the last bubble.
Last week, Moody’s Analytics gave Fortune exclusive access to its proprietary up-to-date analysis of US housing markets. The firm aimed to find out whether fundamentals, including local income levels, could support local house prices. Discovery? During the first quarter of 2022, national housing prices are “overvalued” by 24.7%. That’s up from the fourth quarter of last year, when Moody’s Analytics determined that national house prices were “overvalued” by 20.9%.
Let’s be clear: this doesn’t mean that Moody’s Analytics thinks US home prices are about to drop 24%. Instead, it means house prices are, historically speaking, very high relative to household incomes. Now that we’ve reached that level, Zandi says, it will be harder for house price growth to push higher. Indeed, Zandi predicts that the year-over-year house price growth rate will stagnate at 0% by this time next year.
But not all regional real estate markets will be so lucky. While Zandi doesn’t expect home prices to drop nationwide, it does estimate that significantly “overvalued” real estate markets, places like Boise and Charlotte, could see home prices drop 5% to 10%. over the next 12 months. If a recession actually materializes – something Moody’s Analytics gives a 1 in 2 chance of occurring over the next 24 months – then Zandi says national house prices could fall by around 5%. Meanwhile, if a recession hits, Zandi says, these grossly “overvalued” real estate markets would likely see home prices drop 15-20%.
Of the 413 regional real estate markets measured by Moody’s Analytics, the firm estimates that 96% are “overvalued”. Simply put: Across most of the country, house prices are above what the underlying fundamentals would have historically supported.
Among the markets analyzed by Moody’s Analytics, 183 are “overvalued” by more than 25%. This represents an increase from the 150 regional real estate markets it deemed “overvalued” by more than 25% in the fourth quarter of 2021. The most “overvalued” markets are concentrated in the fast-growing cities of Mountain West and Sunbelt which benefited from the country’s work- boom from home. This includes both Boise (“overvalued” by 72%) and Charlotte (“overvalued” by 66%).
Which of these “overvalued” real estate markets are likely to see house prices fall? In order, Zandi points to these “juiced-up” regional housing markets: Boise; Colorado Springs, Colorado; Vegas; Coeur d’Alene, Idaho; Tampa; Atlanta; Fort Collins, Colorado; Sherman, Texas; Jacksonville; Idaho Falls, Idaho; Lakeland, Florida; Greeley, Colorado; Longview, Wash.; Charleston, South Carolina; Albany, N.Y.; Denver; Clarksville, Tenn.; Greensboro, North Carolina; and Charlotte.
We are already seeing the change in the US housing market. As data rolls in for May and June, it’s clear that the pandemic housing boom has finally died down. New home sales, existing home sales and mortgage applications are plummeting. This forces some sellers to do what would have seemed absurd three months ago: they reduce their price. Last week, 6.44% of real estate listings on Zillow experienced a price drop, the highest weekly share of price drops in more than five years.
Where does the housing market go from here? For the next few months, housing economists say Fortune we should expect a further slowdown.
Zandi goes further. He already calls this slowdown a “housing correction”. Going forward, he says, we’ll see home sales continue to fall as more homebuyers balk at record home prices. But it’s not just because house prices have gotten too high. Over the past six months, the average 30-year fixed mortgage rate has risen from 3.2% to 5.85% as the Fed takes the fight against inflation seriously. This causes many borrowers, who must meet strict lender debt ratios, to lose their mortgage eligibility.
“The housing market is rocking,” says Zandi.
If you’re hungry for more housing data, follow me on Twitter at @NewsLambert.
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