These 40 ‘Overvalued’ Real Estate Markets Could See a 15%-20% Decline in Home Prices if a Recession Hits

A housing bubble requires both a flood of speculators entering the market and “overvalued” home prices. Oh, and the bust at the end, of course.

Unlike the housing bubble that burst in 2008, the pandemic housing boom isn’t underpinned by a frenzy of speculation, says Moody’s Analytics chief economist Mark Zandi. While home renovations have certainly increased during the pandemic, he says, we’re not seeing the exuberance of the last bubble.

So is the coast clear? Well, not so fast. While Zandi won’t call this latest boom, which has sent US home prices up 37% in the last two years, a bubble, her research finds that we are once again in the midst of a housing market historically.” overvalued”.

Last week, Moody’s Analytics gave Fortune exclusive access to its up-to-date proprietary analysis of US housing markets. The firm aimed to find out if fundamentals, including local income levels, could support local home prices. The find? Through the first quarter of 2022, national house prices are “overvalued” by 24.7%. That’s more than the fourth quarter of last year, when Moody’s Analytics found national home prices to be “overvalued” by 20.9%.

Let’s be clear: that No it means that Moody’s Analytics believes that US home prices are about to fall by 24%. Instead, what it means is that home prices, historically speaking, are priced very high relative to household income. Now that we have reached this level, Zandi says, it will be more difficult for house prices to rise. In fact, Zandi predicts that the year-over-year rate of home price growth will level off to 0% by this time next year.

But not all regional real estate markets will be so lucky. While Zandi doesn’t predict home price declines nationally, it does estimate that significantly “overvalued” housing markets, places like Boise and Charlotte, could see home price drops of 5% to 10% in the next 12 months. If a recession does materialize (something Moody’s Analytics gives a 1 in 2 chance of happening in the next 24 months), then Zandi says national house prices could fall by around 5%. Meanwhile, if a recession hits, Zandi says, those significantly “overvalued” housing markets would likely see home prices slashed by 15% to 20%.

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Among the 413 regional real estate markets measured by Moody’s Analytics, the firm considers that 96% are “overvalued”. Bottom line: Almost the entire country has home prices that are higher than underlying fundamentals would historically support.

Among the markets analyzed by Moody’s Analytics, 183 are “overvalued” by more than 25%. That’s more than 150 regional housing markets it deemed “overvalued” by more than 25% in the fourth quarter of 2021. The most “overvalued” markets are concentrated in fast-growing cities in the Mountain West and Sunbelt that benefited from the work of the nation. home boom. That includes both Boise (“overvalued” by 72%) and Charlotte (“overvalued” by 66%).

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Among those “overvalued” real estate markets, which ones are likely to see home prices fall? In order, Zandi points to these “squeezed” regional real estate markets: Boise; Colorado Springs, Colorado; Las Vegas; Coeur d’Alene, Idaho; cover; Atlanta; Fort Collins, Colorado; Sherman, Texas; Jacksonville; Idaho Falls, Idaho; Lakeland, Fla.; Greeley, Colorado; Longview, Washington; Charleston, South Carolina; Albany, New York; Denver; Clarksville, Tennessee; Greensboro, North Carolina; and Charlotte.

We are already seeing the turnaround in the US housing market. As the data for May and June roll in, it is clear that the housing boom of the pandemic has finally fizzled out. New home sales, existing home sales and mortgage applications are plummeting. That’s forcing some sellers to do what three months ago would have sounded absurd: They’re cutting their price. Last week, 6.44% of home listings on Zillow saw a price cut, the highest weekly share of price cuts in more than five years.

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Where does the real estate market go from here? Over the next several months, housing economists say Fortune we should expect a further slowdown.

Zandi goes further. He is already calling this slowdown a “housing correction.” Looking ahead, he says, we’ll see home sales continue to fall sharply as more homebuyers balk at record home prices. But it’s not just because home prices have gone up too much. In the last six months, the average 30-year fixed mortgage rate has soared from 3.2% to 5.85%, as the Federal Reserve gets serious about fighting inflation. That’s causing many borrowers, who must meet lenders’ strict debt-to-income ratios, to lose their mortgage eligibility.

“The housing market is crashing,” says Zandi.

If you’re hungry for more housing data, follow me on Twitter at @NewsLambert.

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