Is America on the verge of a new housing collapse? Mountain West and Sun Belt overvalued by 72%

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House prices could fall by up to 20 percent next year if there’s a recession, experts warn – and property in some areas of the country is overvalued by as much as 72 percent. 

Mark Zandi, chief economist for Moody’s Analytics, was pessimistic about the housing market in May, but he has now made his forecasts even more bleak, Fortune reported on Wednesday.

It comes amid ongoing arguments over whether the US is already in a recession, with the country recording two consecutive quarters of negative growth – the traditional definition of such a slump.  

The news is particularly dire for people who have purchased homes in what Fortune terms ‘bubbly’ markets, with Boise in Idaho, Charlotte in North Carolina and Austin in Texas all named the most overvalued markets.

But a total of 180 other areas across the US have property deemed overvalued, many of them highly-desirable.

They include LA, Orlando, Seattle and Indianapolis, where property is all estimated to be 30 percent overvalued. 

Homes in Houston are around 34.5 per cent overvalued, while properties in Montana are 25 per cent overvalued.

Picturesque Bend in Oregon – regularly voted one of the United States’ best places to live – has homes that are 43.8 per cent overvalued, according to Moody’s, with Billings in Montana 25 per cent overvalued.  

REVEALED: America’s overvalued areas 

While Boise, Charlotte and Austin are top three in the US for overvalued properties, 180 other other areas across the country also have property values that Moody’s warns are inflated.

They include: 

Los Angeles/Long Beach: 30.3%

Ogden-Clearfield (Utah): 50.6%

Seattle-Tacoma: 29.5%

Orlando: 30.4%

Denver-Fort Collins: 42.7%

Houston: 34.5%

Indianapolis: 29.5%

Burlington (Vermont) 27%

Columbus (Ohio) 29.4%

Grand Rapids (Michigan) 45.6% 

Las Vegas: 53.3%

Bend (Oregon) 43.8% 

Billings (Montana) 25%

Rapid City (South Dakota): 44.2% 

Atlanta: 35.3%

Charleston: 35.6% 

It comes weeks after the US Central Bank hiked the benchmark interest rate to 2.5 per cent, with another increase to 3.4 per cent expected by the end of the year as the Fed tries to tame inflation.

Those interest rate hikes are expected to plunge the US into recession, and will also likely lower the cost of property as it becomes too expensive for many to get a mortgage, cratering demand.  

The most over-valued areas are largely in the Mountain West and Sunbelt.

Boise, Idaho – which saw house prices skyrocket during the pandemic, as droves swapped pricey cities in the Bay Area and wider California for the buzzing Idaho city – is the most overvalued area, Zandi said.

Boise, where the current average house is worth $526,050 according to Zillow, is almost 72 percent overvalued, although a recession is only expected to wipe 20 percent off the prices of homes at most. 

Charlotte in North Carolina is the second most overvalued, at 66 percent, with Austin third place at 61 percent.  

Charlotte, North Carolina, is 66 percent overvalued, with the average home at $406,137 at the moment – and Austin, Texas is 61 percent overvalued, at an average of $661,337.

Flagstaff, Arizona ($668,845), is overvalued by 61 percent, while Nashville, Tennessee ($460,447) is 54 percent overvalued and Miami ($552,082) is 34 percent.

It is unclear why those overvalued areas are expected to see a maximum of 20 percent wiped off house prices, rather than the full amount experts believe they’re overvalued by.  

Only a handful of places were considered undervalued – the most undervalued being Decatur, Illinois, where the average house is $92,129, undervalued at 6 percent.

Montgomery, Alabama ($135,742) is 2.6 percent undervalued and Grant’s Pass, Oregon ($418,440) is 3.1 percent.

The housing inventory is at its highest level since April 2009, as sellers struggle to get rid of their property because mortgages have become more expensive, and other financial pressures – high gas prices, soaring costs of groceries – continue to be felt.

Mortgage rates have nearly doubled since January, rising to 5.13 percent for a 30-year loan as of last week, according to Freddie Mac.

The Fed’s effort to bring down inflation by slowing spending has caused a marked slowdown of home sales.

Moody’s Analytics assesses every quarter whether local economic fundamentals, including local income levels, can support local house prices.

Their latest data, shared with Fortune, found that 183 of the nation’s 413 largest regional housing markets are ‘overvalued’ by more than 25 percent.

And nationwide, housing prices will also likely decline, Zandi felt.

He predicts U.S. house prices across the country will decline over the next 12 months between zero and -5 percent: a more pessimistic forecast than in June, when Moody’s Analytics expected U.S. house prices to remain unchanged.

If the U.S. enters a recession, it will be worse: house prices will fall between 5 and 10 percent.

In the 183 overvalued areas, houses could fall 15-20 percent in a recession. 

Mark Zandi, chief economist for Moody's Analytics, has updated his forecasts for the housing market to be even more pessimistic

Mark Zandi, chief economist for Moody’s Analytics, has updated his forecasts for the housing market to be even more pessimistic

The 10 cities that saw the biggest share of listing price reductions last month are seen above

The 10 cities that saw the biggest share of listing price reductions last month are seen above

Though home transactions declined, prices remain solidly strong, with July's national median sales price of $403,800 representing a 10.8 percent increase from a year ago

Though home transactions declined, prices remain solidly strong, with July’s national median sales price of $403,800 representing a 10.8 percent increase from a year ago

Moody’s Analytics is not an outlier.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said on Tuesday that the outlook for housing sales is even more grim than the Fed has said, and the ‘worst is yet to come’ for home prices.

He tweeted on Tuesday that he had been ‘bearish as hell about housing for months’ – meaning that he predicted a significant slump in the market.

A bear market is one where prices are falling, and people are selling.

He attached a graph showing the dramatic downturn, and said: ‘Well, I’m feeling vindicated.’

Sales of new single-family homes hit their lowest level in nearly seven years in July, falling 12.6 percent to a seasonally adjusted annual rate of 511,000.

Fitch Ratings said it envisions US home prices dropping by up to 15 percent, and Robert Shiller, an economist who correctly predicted the 2008 housing crash, thinks there is a good chance home prices could fall by more than 10 percent.

A study published by real estate brokerage Redfin on Monday found that a high share of home sellers dropped their asking price in July, particularly in former pandemic boomtowns.

Boise saw 70 percent of listings slashed in July, up from just a third a year ago.

In Denver, 58 percent of home listings were reduced last month, while 56 percent of listings in Salt Lake City were dropped from the initial asking price.

‘Individual home sellers and builders were both quick to drop their prices early this summer, mostly because they had unrealistic expectations of both price and timelines,’ said Boise Redfin agent Shauna Pendleton.

‘They priced too high because their neighbor’s home sold for an exorbitant price a few months ago, and expected to receive multiple offers the first weekend because they heard stories about that happening,’ she added. 

A housing development is seen in Boise, where last month 70% of home listings were slashed below their initial asking price as sellers confronted their 'unreasonable expectations'

A housing development is seen in Boise, where last month 70% of home listings were slashed below their initial asking price as sellers confronted their ‘unreasonable expectations’

In Denver, 58 percent of home listings were reduced last month

In Denver, 58 percent of home listings were reduced last month

Home prices remain solidly strong, with July's national median sales price of $403,800 representing a 10.8% increase from a year ago, and just below the record-high set in June

Home prices remain solidly strong, with July’s national median sales price of $403,800 representing a 10.8% increase from a year ago, and just below the record-high set in June

The average rate for a 30-year fixed mortgage stood at 5.13 percent this week

The average rate for a 30-year fixed mortgage stood at 5.13 percent this week

‘My advice to sellers is to price their home correctly from the start, accept that the market has slowed and understand that it may take longer than 30 days to sell. If someone is selling a nice home in a desirable neighborhood, they shouldn’t need to drop their price.’

Although industry data shows that home prices remain higher than they were a year ago nationwide and in nearly every market, listing reductions have increased dramatically as sellers’ lofty expectations meet with cold reality. 

Redfin said that the national share of homes for sale with price drops reached a record high in July. 

None of the 97 cities included in the analysis had fewer than 15 percent of home listings that were reduced from their initial asking price.

More than half of the cities with the biggest share of price drops – Boise, Denver, Tacoma, Sacramento, Phoenix, San Diego and Portland – were among the 20 housing markets that cooled fastest in the first half of 2022.

Redfin notes those markets had attracted scores of eager homebuyers during the pandemic, when tech workers and other white collar workers fled more expensive markets and drove home prices up in smaller cities.

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