These 183 housing markets could soon see home prices fall 20%, Moody's says

Table of Content

• Will these overvalued housing markets cool off?
• We’re in a historically overvalued housing market, and these cities could see home prices drop 10%, Moody’s says
• Home Prices Are Overvalued: How To Know
• Best War Stocks for September 2022 (Military Industrial Complex)
• Here are the top 25 most overvalued housing markets in the US
• Your Money or Your Life

Home prices have risen sharply in all of these areas, over the past year or so. Historically speaking, nominal home price declines are rare—but they do happen on occasion. It occurred briefly in the early ’80s—after spiked interest rates pushed the economy into a recession—and then again in the early ’90s. Only the Great Depression and the Great Recession have seen price cuts of that magnitude. The fact an esteemed macroeconomist like Zandi raises the possibility of a -10% home price dip is, well, eyebrow raising.

If you borrow money at anegativeinterest rate,you actually end up paying back less than you borrowed. The Federal Reserve has artificially suppressed interest rates in an attempt to stimulate the economy. If the borrower defaults, the lender can file a claim against the guarantor.

Will these overvalued housing markets cool off?

Home buyers simply have to research current housing market trends in their area, and make an informed decision. These and other reports about the housing market being overvalued might cause home buyers to think twice about their purchasing plans. Locals in Boise are now competing with buyers from San Francisco and other big cities, who often have more money to spend on housing. That is driving up prices beyond the reach of many people earning a typical salary in those regions. Zandi added, "Of course, it won't be a slam-dunk better market to purchase a home if you need a mortgage, as mortgage rates will likely be higher."

That baseline forecast assumes the U.S. won’t enter into a recession. If a recession hits, Moody’s Analytics now predicts U.S. house prices will fall between -5% to -10%. That’s up from June, when Zandi told Fortune that a recession would see U.S. house prices fall by less than -5%.

We’re in a historically overvalued housing market, and these cities could see home prices drop 10%, Moody’s says

The most overpriced city in the nation is Boise, Idaho, which became a magnet for technology workers who wanted to relocate from pricey California cities when their offices shut due to the pandemic. By Moody's reckoning, Boise's homes are 73% overvalued, making it the most overpriced city in the nation. "With deteriorating affordability driven by rapid price growth over the past two years and higher financing costs, price appreciation is beginning to turn over in some of the most overvalued markets," Moody's wrote in its report.

A property is said to be overvalued when both of these measures are above their long-term average. And sellers should brace themselves for a difficult time if they hope to get top dollar in the near future. Idaho has four cities ranked in the top 15 overvalued markets on Moody’s list.

Home Prices Are Overvalued: How To Know

If a recession actually materializes—something Moody’s Analytics gives a 1-in-2 chance of occurring over the next 24 months—then Zandi says national home prices could fall by around 5%. Meanwhile, if a recession hits, Zandi says, those significantly "overvalued" housing markets would likely see home prices slashed by 15% to 20%. But like all things real estate-related, such conditions can vary greatly from one city or region to the next. In one-third of U.S. metropolitan areas, housing markets were said to be overvalued by 10% or more. According to the report, this is the result of home-price growth outpacing “underlying economic fundamentals” such as income growth.

Nearly every community in the U.S. is feeling the effects of an overvalued housing market, particularly in some smaller cities in states like Idaho and Tennessee where many sought out a new home during the pandemic. While Zandi won’t call this latest boom—which has sent U.S. home prices up 37% over the past two years—a bubble, his research finds that we're once again amid a historically "overvalued" housing market. Many buyers worry that they will overpay for a home, only to see prices drop over the next few years. This can lead to a scenario where the homeowner becomes “upside down” or underwater in the mortgage loan — something we saw a lot of during the last housing bust. That may explain why smaller cities like Boise are at the top of the list of overvalued home markets, rather than notoriously expensive cities like New York. Housing may be pricier on a per-foot basis in New York or San Francisco, but workers there typically have higher incomes and can support higher costs.

Mark Zandi, the chief economist at Moody’s Analytics, noted how many of these markets were "juiced up" because of previously low mortgage rates and the implementation of remote work during the COVID-19 pandemic. The American home real estate market is saturated with demand. This means home prices are overvalued, and it is a stark reminder of the recent real estate crash. Among the markets analyzed by Moody’s Analytics, 183 are "overvalued" by more than 25%. That's up from 150 regional housing markets it deemed "overvalued" by more than 25% in the fourth quarter of 2021.

Home values in 97% of U.S. cities are overvalued, and real estate in some of the most overpriced regions could fall by 10% over the next few years, according to Moody's Analytics. Overall, the overvaluation of the nationwide housing market, which reached a record-high of 27 percent in the month of June, has dropped significantly to 23.3 percent as of September , according to Moody's. This week, Zandi letFortuneknow that Moody’s Analytics was downgrading its initial forecast. Over the coming year, Zandi now predicts U.S. house prices will shift somewhere between 0% to -5%.

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Properties in the United States of America, Japan and Germany, instead, are still undervalued. House prices in Germany are 20% lower than in France, at the moment, while in the USA, prices may not rebound even if they have bottomed. American prices plunged due to the highly risky mortgages and partly to the increasing unemployment rate that caused distressed sales. As Fortune has previously reported, it may be wise to take all housing forecasts with a grain of salt.

After all, when the COVID-19 recession struck in spring 2020, both Zillow and CoreLogic published housing forecast models predicting that U.S. home prices would fall by spring 2021. "Some markets probably will see some price declines, particularly the most active markets like Boise, the poster child, or the top of the list of overvalued markets," Zandi said. In Tennessee, where four cities made the top 20 list of overpriced markets, homebuyers in Morristown, a city with a population of just under 30,000, are paying 57% over value for homes. And while economists aren’t predicting a crash, they don’t expect these overvaluations will last.