Homebuyers had had enough. Skyrocketing mortgage rates in addition to record house price appreciation—up 42% since the start of the pandemic— has pushed mortgage payments to a level that is simply unattainable for tens of millions of potential buyers. As more and more buyers take a rain check, the correction of the real estate market only becomes more intense.
Even as real estate transactions fallwe 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 market prices reached earlier this year. That said, as inventory levels continue to rise, it’s 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 house 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.
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 the most likely to see the effects of a housing downturn amplify and home prices decline year-over-year if the economy slips into a recession, a scenario that some economists think seems likely as inflation persists and stock markets stumble. Homeowners in these areas who are considering selling may want to quickly put their home up for sale to avoid a potential price drop,” writes Redfin researchers.
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 real estate 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 the owners of markets like Akron and Cleveland are probably grateful: historically speaking, the most pronounced real estate corrections generally occur 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,’ writes Redfin researchers.
all quarters, Moody’s Analytics calculates an “overvalued” or “undervalued” figure for around 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 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 recounts Fortune that housing markets “overvalued” by more than 25% are at risk of see a 5% to 10% drop in real estate prices. If a recession hits, price reductions could reach 15% to 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.
Earlier this month, John Burns Real Estate Consulting said Fortune this Boise is set 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.”
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