The reason U.S. home prices are falling is pretty simple: Pressurized affordability.
A historic mortgage rate shock—with the average 30-year fixed mortgage rate jumping from 3% to 6% this year—following the Pandemic Housing Boom’s 41.3% run-up in U.S. home prices in just over two years has simply pushed many would-be buyers to their breaking point. Other borrowers, who must meet lenders’ strict debt-to-income ratios, have lost mortgage eligibility altogether. That historic squeeze, which comes from prices and rates, is what Fortune calls “pressurized affordability.”
Already, pressurized affordability has seen U.S. home prices, as measured by the Case-Shiller National Home Price Index, fall for the first time on a seasonal adjusted basis since 2012. In total, U.S. home prices fell 2.2% between June 2022 and September 2022. That ties the second biggest home price correction of the post-World War II era.
Whenever a publication like Fortune says “U.S. homes prices,” we’re talking about a national aggregate. Whatever comes next in the U.S. housing market will surely vary by market, price point, and home-type.
To get an idea of what might come next, Fortune once again reached out to Moody’s Analytics to get their updated home price forecast (see map below) for 322 of the nation’s largest housing markets. (Here’s their previous metro-by-metro forecast).
Here’s what the data says.
Back in May, Moody's Analytics chief economist Mark Zandi told Fortune that the Federal Reserve's inflation fight would see the U.S. housing market slip into a "housing correction." At the time, he expected home prices to flatline nationally and fall between 5% to 10% in "significantly overvalued" markets.
Zandi, of course, was right about the housing correction. That correction has actually been so sharp that Moody's Analytics in October once again lowered its national home price outlook. Peak-to-trough, Zandi expects U.S. home prices to fall 10%. If a recession does manifest, that outlook shifts down to a 20% peak-to-trough decline.
"No change in our outlook for [national] house prices or the mortgage rate. I am feeling more confident that the economy will be able to avoid a full-blown recession next year, which is consistent with the 10% peak-to-trough decline in national house prices," Zandi told Fortune on Friday. Through spring 2023, he expects mortgage rates to hover around 6.5%.
While Zandi expects around a 10% peak-to-trough home price decline nationally, he expects it to vary regionally. In markets like Morristown, Tenn. and Muskegon, Mich., Moody's Analytics predicts home prices to fall 24.1% and 23.3%, respectively. The firm expects markets like New York and Chicago to fall by 6.3% and 4.2% from peak-to-trough.
Heading forward, Moody's Analytics expects "significantly overvalued" housing markets to see the sharpest declines. (You can find Moody's market-by-market overvaluation study here).
Look no further than markets like Boise and Flagstaff, Ariz. Just weeks into the pandemic, those markets got flooded with buyer interest from white-collar professionals working in high-cost cities like Seattle and San Francisco. While remote work was a game changer for those uprooted white-collar workers, it didn't fundamentally change local incomes. So as the boom raged on, Boise and Flagstaff became "overvalued" by 76.9% and 65.6%.
Fast-forward to 2022, and decelerating levels of migration means those boomtowns must rely more on local incomes. That'll be hard to do, Zandi says. And for that reason, Moody's forecast model expects home prices in markets like Boise and Flagstaff to drop over 20% from peak-to-trough.
While speaking at a Brookings Institute event on Tuesday, Fed Chair Jerome Powell said the run-up in home prices during the Pandemic Housing Boom qualifies a "housing bubble."
“Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing," Powell said. "So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand."
The Pandemic Housing Boom did indeed see housing fundamentals get out-of-whack. According to Moody's Analytics, the average U.S. housing market was "overvalued" by 1% in the second quarter of 2019. Through the second quarter of 2022, the average U.S. housing market was "overvalued" around 25%.
Heading forward, Zandi doesn't expect a 2008-style financial crisis or foreclosure crisis, but he does expect housing fundamentals to pull back towards the mean. Some of that moderation will come through rising incomes, some of it will come through falling home prices.
"Before [home] prices began to decline, we were overvalued [nationally] by around 25%. Now this means [home] prices will normalize. Affordability will be restored. The [housing] market won't be overvalued after this process is over," Zandi says. "It's all about affordability. First-time buyers are locked out of the market. They simply can't afford mortgage payments. Trade-up buyers won't sell and buy because it doesn't make any economic sense."
Of course, the home price correction has already arrived.
Just over half of the country's 400 biggest housing markets have seen local home values, as measured by Zillow, fall off their 2022 peak. The average decline being -2%.
The ongoing correction has hit two different types of markets the hardest: high-cost West Coast markets, and "bubbly" boomtowns.
Even before the correction got into full-swing, John Burns Real Estate Consulting told Fortune that high-cost West Coast markets were at higher risk of declining values. The reason being they're simply more rate sensitive. Markets like Seattle (down 6.3%) and Portland, Ore. (down 5.1%) are hit by a double whammy: Not only are their high-end real estate markets more rate-sensitive, but so are their tech sectors. There's also the fact that homebuilders and iBuyers—who are more likely to price down during a correction—make up a higher concentration of inventory out West.
The other group of markets who've been hit hard by the correction are bubbly markets. These markets, which includes places like Austin (down 10.2%) and Boise (down 7.1%), saw their home values get detached from underlying fundamentals (i.e. local incomes) during the boom. And now, they're seeing sharper pullbacks.
Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.
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