These housing markets are most at risk of falling home prices

Homebuyers had had enough. Soaring mortgage rates to a record high of home prices – which have risen 42% since the start of the pandemic – have pushed monthly mortgage payments beyond the reach of tens of millions of potential buyers. As more buyers check out the rain, the housing market correction becomes more severe.

This week, we learned that on a year-over-year basis, mortgage applications are down 18%. While new home sales fell 17%, single-family home starts fell 16%.

Even with lower housing transactions, we are not yet back in a balanced market. Inventory levels are still a staggering 49% below July 2019 levels, giving most sellers – at least for now – enough leverage to stop selling below market prices that were hit earlier this year. However, with stock levels continuing to rise, some regional housing markets are likely to see a year-on-year decline 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 the “risk score” in the market, the more likely the market will see a year after year decline in home prices. In all, Redfin looked at 98 regional housing markets and evaluated factors including home price volatility, average debt-to-income ratio and home price growth.

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Of the 98 markets measured by Redfin, Riverside had the highest probability of seeing a “housing dip.” It was followed by Boise, Cape Coral, Northport, Las Vegas, Sacramento, Bakersfield, Phoenix, Tampa, and Tucson.

“Popular immigration destinations where home prices have risen during the pandemic — including Boise, Phoenix and Tampa — are likely to see the effects of the housing slump amplified and house prices fall year on year if the economy enters a recession, a scenario that some economists believe appears likely with Inflation continues and stock markets falter. Homeowners in those areas who are considering selling may want to list their homes soon to avoid a potential price drop,” Redfin researchers wrote.

Sellers least likely to see prices go down? Radvin says Akron. Not far from markets like Philadelphia, El Paso, Cleveland and Cincinnati. As the pandemic housing boom took off, homeowners in those locations saw less investor activity and more modest levels of home price growth. In the midst of the boom, homeowners in places like Akron certainly had FOMO as they watched their peers in Austin and Boise face exorbitant levels of home price growth. But now homeowners in markets like Akron and Cleveland are likely to be grateful: Historically, the sharpest corrections in the housing sector usually come in the fastest-growing markets.

“Relatively affordable northern metro stations—many of which are in Rust Belt, such as Cleveland and Buffalo—are the most resilient in the slump. Potential homebuyers in these areas can proceed with confidence that they are less likely to see home values ​​decline,” write the Redvin researchers.

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Every quarter, Moody’s Analytics calculates an “overvalued” or “undervalued” number for nearly 400 markets. The company aims to see if the fundamentals, including local income levels, can support local home prices. It’s only annoying when the housing market becomes massively “overrated”. Bad news? In the first quarter of 2006, the average US housing market was “overvalued” at 14.5%. In the first quarter of 2022, Moody’s estimates that the average regional housing market is “overrated” at 23%.

Just being detached from the basic economic fundamentals does not guarantee that the market will experience a sharp decline in home prices. However, when the market becomes too “overvalued”, it increases the odds of lower house prices if both a housing correction and a recession occur. says Mark Zandi, chief economist at Moody’s luck That housing markets “overvalued” by more than 25% are likely to see home prices fall by 5% to 10%. In the event of a recession, prices could drop as much as 15% to 20% in those markets.

Already, we’re seeing “bubbly” markets like Boise and Austin see the fastest corrections. Just look at the stock. Over the past six months, inventory levels are up 161% and 220% in Boise and Austin, respectively.

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Earlier this month, John Burns Real Estate Consulting said luck Boise is poised to be the first housing market to record year-on-year price drops. The real estate research firm predicts that it may come as soon as December. For that to happen, Boise home prices would not only have to erase all of their Spring 2022 gains, but would also drop below their December 2021 price.

“That’s exactly what we’re all seeing right now,” said Rick Palacios Jr., head of research at John Burns Real Estate Advisors.

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