We're beyond doubt that the housing correction will push prices lower. There are two big questions that need to be answered before we can confidently predict the future of the housing market: how many regional markets will see house price declines, and how far will those markets fall?
According to a report by Fortune, the chief economist of credit rating agency, Moody's Analytics, believes that national home prices will fall 5% to 10% from their peak. If a recession hits, he said that home prices would drop 5% to 10%.
Although the national home price correction is expected to be much steeper, it's not expected to bottom out until at least the next 12 to 18 months. In certain regions, such as those with overvalued housing markets, Moody's Analytics projects that home prices will drop 5% to 10%. If a recession hits, the agency projects that home prices will decline by up to 20%.
Every quarter, the agency studies the local economic fundamentals of a region to determine if it can support home prices. If a housing market is overvalued by more than 25%, it considers it to be significantly overvalued. In the first quarter of the year, almost 180 of the country's 413 largest housing markets were overvalued. However, this week, it was revealed that the number of housing markets that were overvalued grew to 210 during the second quarter of 2022.
Over half of the country's largest housing markets are expected to experience home price declines of around 15% to 20%. For perspective, during the peak to trough period, home prices in the U.S. declined 27%.
Some of the areas where housing markets are significantly overvalued include Charlotte, Austin, Las Vegas, and Phoenix. These cities have seen home prices increase by over 60%, 66%, and 59%, respectively.
The pandemic hit several housing markets, including Phoenix and Austin. Not only did these areas get caught off-guard by the sudden surge of foreign investors, but they also experienced a flood of investors. These investors, who are often landlords or short-term investors, were looking for the best deal possible when mortgage rates were at historically low levels.
According to the underlying fundamentals of the housing market, many local residents in places such as Phoenix and Austin were already priced out before the pandemic hit. However, now that mortgage rates are rising, many would-be home buyers are no longer able to afford to purchase in these areas.
Falling home prices are exactly what Las Vegas and other areas such as Idaho need to get back on track. The rising interest rates will continue to impact the housing market and force it to reset its affordability. Right now, we're seeing multiple markets across the country where home prices are expected to fall double digits.