Never again. That was the sentiment held among legislators as they rallied to pass the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010. The goal was to outlaw the subprime mortgages that fueled the ’00s housing bubble—which saw U.S. home prices soar 84% between January 2000 and June 2006—and ultimately pushed the country into the deepest recession since the Great Depression.
Fast forward to 2022, and we’re once again hearing “housing bubble” talk. Economist Robert Shiller, who predicted the last housing bubble in 2005, recently hinted that housing may be in another bubble. Economists at the Federal Reserve Bank of Dallas put the real estate industry on edge this spring after they published a paper titled “Real-time market monitoring finds signs of brewing U.S. housing bubble.” Why the renewed concern? Over the past year alone, home prices have gone up four times faster than incomes. Simple economic theory, which dictates that neither home prices nor incomes can outgrow the other for very long, tells us that isn’t sustainable.
There’s another reason bubble talk has suddenly reemerged: The spike in mortgage rates—up from 3.2% to 6% over the past six months—means home shoppers are finally feeling the full brunt of the pandemic housing boom, which pushed U.S. home prices up 37% between March 2020 and March 2022.
To better understand where the housing market stands, at least from a historical perspective, Fortune reached out to Moody’s Analytics. The financial intelligence firm provided this publication an exclusive look at their quarterly proprietary analysis of 414 regional U.S. housing markets. The analysis runs between the fourth quarter of 1992 and the first quarter of 2022. (Back in May, Fortune looked at a similar analysis conducted by the Real Estate Initiative at Florida Atlantic University).
The analysis conducted by Moody’s Analytics aimed to find out whether economic fundamentals, including local income levels, could support local home prices. On a national level, Moody’s Analytics finds U.S. home prices are “overvalued” by 24.7%. In other words, U.S. home prices are 24.7% higher than they’d historically trade at given current income levels. While that doesn’t mean home prices are about to fall by 24.7%, it does mean that, historically speaking, home prices have moved into the upper bounds of affordability. The last time that happened? During the 2000s housing bubble.
Now, let’s take a look at the data.
Among the nation’s 414 largest regional housing markets, Moody’s Analytics finds 344 have home prices in the first quarter of 2022 that are “overvalued” by more than 10%. Among those places, 183 markets are “overvalued” by more than 25%, while 27 markets are “overvalued” by more than 50%.
This time around, the most “overvalued” home values are in Southwest, Mountain West, and Southeast markets that saw a flood of WFH workers during the pandemic. Boise and Phoenix, which were hot spots for expat Californians during the pandemic, are “overvalued” by 72% and 54%, respectively.
Heading forward, Moody’s Analytics chief economist Mark Zandi says frothy house prices should be a drag on future home price growth. Over the coming 12 months, Zandi predicts year-over-year U.S. home price growth will plummet from the record rate of 20.6% to 0%. In significantly “overvalued” housing markets like Boise and Phoenix, Zandi forecasts a 5% to 10% home price drop. Already, Zandi says the Federal Reserve’s campaign against runaway inflation has seen the pandemic housing boom flip into a “housing correction.” For evidence, he points to spiking inventory levels and plummeting home sales.
But Zandi’s prediction goes out the window if a recession does indeed manifest. If a recession hits, Zandi predicts U.S. home prices would fall by 5% on a year-over-year basis—while significantly “overvalued” housing markets would see, Zandi says, a 15% to 20% home price dip. (To see the 40 regional housing markets most vulnerable to a price drop, go here).
It isn’t just about how expensive housing got—it’s how fast it got there. The U.S. went from a historically affordable housing market to a historically unaffordable housing market over just 24 months. Back in the first quarter of 2020, just 81 of the nation’s 414 largest regional housing markets were “overvalued” by more than 10%, according to Moody’s Analytics. Among those places, six markets were “overvalued” by more than 25%. While none were “overvalued” by more than 50%.
How did things change so quickly?
Instead of crashing the housing market, the pandemic actually helped to spur perhaps the fiercest housing boom ever recorded. It was a perfect storm. Historically low mortgage rates, ushered in by the Fed’s response to the COVID-19 recession, were too good of a deal to pass up on. That saw investors rush into the housing market. They were joined by white-collar professionals who saw their jobs transition to remote jobs during the pandemic and were eager to move out of cramped apartments in cities like New York and Chicago. The pandemic also coincided with the five-year window (between 2019 and 2023) when millennials born during the generation’s five largest birth years (between 1989 and 1993) hit the peak first-time home buying age of 30. That rush of demand simply overwhelmed housing inventory, which was already on the decline even before the pandemic hit. Cue record home price growth.
Among the nation’s 414 largest regional housing markets, Moody’s Analytics finds that 261 markets were “overvalued” by more than 10% in the first quarter of 2007. Among those places, 102 markets were “overvalued” by more than 25%. While 10 markets were “overvalued” by more than 50%.
Those 2007 figures are eerily similar to the 2022 figures. But there’s one big difference: the locations of the “overvalued” markets.
The pandemic housing boom has been the most pronounced in the Southwest, Southeast, and Mountain West. Markets across Nevada, Arizona, Idaho, Texas, Utah, North Carolina, and Florida have absolutely exploded. During the last boom, the regional picture was fairly different. While Arizona, Florida, and Nevada were also leaders during the ’00s housing boom, so were markets across the Northeast and California. This time around, Northeast and California markets have seen relatively milder booms—while Texas, which was largely missed by the early 2000s bubble and subsequent crash, is among the epicenters of the pandemic housing boom.
That sharply different regional story can be seen in the Moody’s Analytics analysis. Back in the first quarter of 2007, Moody’s Analytics rated the San Francisco and New York City metros as “overvalued” by 26% and 29%, respectively. Through the first quarter of 2022, San Francisco and New York are “overvalued” by just 11% and 7%.
Meanwhile, Phoenix and Las Vegas (which were “overvalued” by 36% and 40% in 2007) are once again significantly “overvalued” (this time by 54% and 53%).
It’s crystal clear: Historically speaking, we’ve once again seen U.S. home prices move into the upper bounds of affordability. That marks the third time over the past half century. After hitting similar affordability levels during the inflationary 1970s, U.S. home prices began to decline on a “real” basis (i.e. home price growth minus inflation), while nominal home prices continued to grow. Meanwhile, the other period (i.e. the bursting 2008 housing bubble) famously saw home prices plummet on both a “real” and nominal basis.
Even if a nominal home price decline comes this time, it’s unlikely to be like 2008. At least that’s according to research conducted by economists at the Dallas Fed. While the Dallas Fed found home prices are once again detached from underlying economic fundamentals, they also found that homeowners are in much better financial shape this time around. For that reason, the Dallas Fed doesn’t believe a housing correction in 2022 or 2023 could deliver the dire results it did during the 2008 housing bust.
That said, the pandemic housing boom certainly has many housing economists feeling uneasy.
“This might be a housing bubble. The evidence suggests it looks like a housing bubble. A little bit like a duck. It walks like a duck, it looks like a duck, it certainly might be a duck,” Enrique Martínez-García, a senior research economist at the Dallas Fed, told Fortune back in May. While he won’t call this a housing bubble, he says it’s time to “raise awareness to the potential risks [that] housing poses.”