Home buyers have had enough. Rising mortgage rates on top of record house price increases — a 42% increase since the start of the pandemic — pushed monthly mortgage payments to levels simply out of reach for tens of millions of potential buyers. As more buyers rain check, the correction in the housing market only intensifies.
This week we learned that year-over-year mortgage applications have fallen by 18%. While new home sales have fallen by 17%, and single-family home starting up by 16%.
Even as housing transactions plummet, we still haven’t returned to a balanced market. Inventory levels remain as much as 49% below July 2019 levels, giving most sellers — at least for now — enough leverage to hold off on selling below the market compositions reached earlier this year. That said, as inventory levels continue to rise, some regional housing markets may 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 crisis’. The higher a market’s ‘risk score’, the more likely the market could see house prices fall on an annual basis. In total, Redfin looked at 98 regional housing markets and assessed factors such as house price volatility, the average debt-to-income ratio and house price growth.
Of the 98 markets measured by Redfin, Riverside had the highest probability of a ‘housing crisis’. It was followed by Boise, Cape Coral, North Port, Las Vegas, Sacramento, Bakersfield, Phoenix, Tampa and Tucson.
“Popular migration destinations where house prices rose during the pandemic — including Boise, Phoenix and Tampa — are likely to see the effects of a housing decline amplify and house prices fall year over year if the economy enters a recession, a scenario that some economists say seems likely. , as inflation continues and stock markets stumble. Homeowners in those areas who are considering selling may want to list their homes soon to avoid potential price drops,” the Redfin researchers write.
The sellers least likely to see prices fall? Redfin says Akron. Not far behind are markets such as Philadelphia, El Paso, Cleveland and Cincinnati. When the pandemic housing boom started, homeowners in those places saw less investor activity and more modest home price growth. Amid the boom, homeowners in places like Akron were sure to have FOMO as they watched their Austin and Boise peers experience exorbitant levels of home price growth. But now homeowners in markets like Akron and Cleveland are probably grateful: Historically, the sharpest housing corrections tend to come in the fastest-growing markets.
“Relatively affordable northern subways—some of them in the Rust Belt, such as Cleveland and Buffalo—are the most resilient in the event of a recession. Potential homebuyers in those areas can continue confident that they will be less likely to see home values decline.” , write the Redfin researchers.
Each quarter, Moody’s Analytics calculates an “overvalued” or “undervalued” figure for approximately 400 markets. The company wants to find out whether fundamental factors, including local income levels, can support local house prices. It is only alarming when a housing market becomes significantly ‘overvalued’. The bad news? In the first quarter of 2006, the median US housing market was “overvalued” at 14.5%. In the first quarter of 2022, Moody’s estimates the median regional housing market is “overvalued” by 23%.
Just being disconnected from the underlying economic fundamentals is no guarantee that a market will see house prices plummet. However, as a market becomes significantly “overvalued”, the likelihood of falling house prices increases if both a housing correction and a recession hit. Moody’s chief economist Mark Zandi says: Fortune that housing markets are “overvalued” by more than 25%, are likely to see a 5% to 10% drop in house prices. If a recession hits, the price drops in those markets can be as high as 15% to 20%.
We are already seeing “bubbly” markets like Boise and Austin seeing the fastest corrections. Just look at the inventory. In the past six months, stock levels in Boise and Austin are up 161% and 220% respectively.
Earlier this month, John Burns told Real Estate Consulting: Fortune that Boise is poised to be the first housing market to see a year-on-year price decline. The real estate research firm predicts it could come as early as December. For that to happen, house prices in Boise would not only have to wipe out all of their gains in the spring of 2022, but also fall below their December 2021 price.
“You could argue strongly that in many housing markets, the last 10% of house price rises were purely ambitious and irrational, and that will come off the top very soon,” Rick Palacios Jr., head of research at John Burns Real Estate Consulting “That’s exactly what we’re all seeing right now.”
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