Main Content

Home » Which Housing Markets Are Vulnerable to Big Price Declines?

Which Housing Markets Are Vulnerable to Big Price Declines?

By Realty Times

There was undoubtedly a pandemic housing boom, and that’s not disputable at this point. The millennial demographics were favorable for homebuying, as were limited inventory, and low unemployment. Now, however, it appears as if the boom is fizzling, and analysts are looking at what could be a housing correction.

So, which markets are likely to be most affected?

What is a Housing Correction?

A housing correction is when the market works towards more of an equilibrium. The market was priced for mortgage rates of around 3%, but if the home sales volume starts to decline sharply, the nation is potentially experiencing a correction in home prices.

Currently, across the board, overall housing activity is declining. In some markets, home prices are already falling as of September.

Fed Chair Jerome Powell recently said the housing market in the United States is entering into what he called a difficult correction.

Moody’s Analytics downgraded their U.S. outlook for the housing market in August. Moody’s expected home prices would fall between 0-5% overall, with declines between 5-10% for overvalued housing markets. The August forecast assumed no recession. In the event of a recession, Moody’s expected home prices would fall between 5% to 10%, with overvalued markets seeing a decline of 15-20%.

Only a month from that prediction, Moody’s Analytics is adjusting its outlook downward further.

Moody’s now says prices will fall between 5-10%, with a forecasted drop in overvalued markets between 10-15%. If there’s a recession, which seems inevitable, Moody’s expects home prices to decline 10-15%, with overvalued markets seeing a drop between 20-25%.

There was a 43% jump in prices during the pandemic boom, so if home prices went down 15%, hypothetically, it would not erase most of those gains. It would however be the second most significant decline in home prices in the era post-World War II. Only the housing bubble bursting would be ahead of it, where prices went down 27% between 2006 and 2012.

If home prices drop by double, media outlets will likely start labeling it the Pandemic Housing Bubble rather than the Pandemic Housing Boom.

Where Are the Significantly Overvalued Markets?

Moody’s Analytics looks every quarter at whether local economic fundamentals can support the housing prices in that particular market. If a market is overvalued by above 25%, Moody’s officially labels it as significantly overvalued.

Through the first quarter of 2022, 183 of 413 regional housing markets were overvalued by more than 25%. In 2022’s second quarter, the figure went up to 210 markets.

Overvalued markets, historically, are at the most significant risk of a decline in home prices if there is a correction.

Housing price declines are hard-hitting markets like Austin, Boise, Phoenix, and Denver. These markets saw a lot of work-from-home buyers coming from cities like New York and San Francisco, and these buyers drove up home prices a lot more than what local incomes would support.

The second group of areas being impacted already includes tech hubs, such as Seattle and San Francisco. They aren’t overvalued compared to local incomes, but high-end real estate is more rate-sensitive. Tech sectors are also rate-sensitive, so they’re simultaneously impacted in multiple ways.

Based on Moody’s current estimates, it could take anywhere from 12 to 18 more months before we see the end of the pricing correction in the U.S. real estate market.