A housing market slump looked all but assured two years ago. At the time, it made sense: The strict state-issued lockdowns had pushed the U.S. unemployment rate to its highest level since the Great Depression era, and many states had banned in-person home showings. However, a housing bust didn’t come to pass. Both Congress and the Federal Reserve stepped in with unprecedented economic aid, and after just two months of recession the U.S. economy and housing market flipped into high growth.
The Federal Reserve has a dual mandate from Congress: Maintain maximum employment and keep prices stable. Of course, with inflation at its highest level in 40 years, there’s no doubt which of the Fed’s mandates currently tops its priority list. An inflation-fighting Fed has big implications for the U.S. housing market, Zandi says. Already, the Federal Reserve is putting upward pressure on mortgage rates as a way to rein in price growth in the housing market and the broader economy. Indeed, over the past two months, the average 30-year fixed mortgage rate has spiked from 3.11% to 5.1%.
That swift uptick in mortgage rates amounts to an economic shock to the red-hot housing market. We’re already starting to see it soften the market a bit. In the coming months, Zandi says, that cooling should only intensify. By this time next year, he predicts, year-over-year home price growth will be at zero.
At this point, Zandi doesn’t foresee a national home price correction. However, he does believe some of the nation’s most overpriced housing markets could see home prices decline up to 10% over the coming year.
To get an indication of which housing markets are at risk of a home price correction, Fortune asked Moody’s Analytics for its proprietary analysis of U.S. housing markets. The firm aimed to find out whether local income levels could support local home prices. The finding? Of the 392 metropolitan statistical areas it looked at, 96% are “overvalued.” Among those 392 markets, 149 are overvalued by at least 25%. The most overvalued being Boise, where home prices are 73% above what fundamentals would support. The fact Boise is “overvalued” relative to local incomes isn’t surprising given the influx of California expats who bought there during the pandemic.
Over time, regional housing markets can’t remain “overvalued” to this degree, Zandi says. That should be a drag on future home price growth.
“In terms of house prices, I expect it [growth] to go flat…there will be markets where we will see a price decline of around 5% to 10%,” Zandi says. While he doesn’t foresee the ongoing boom as a housing bubble—which would require both home price overvaluation and speculation in the market—he does say there is some “speculation creeping in” including in places like Phoenix and Charlotte. According to Moody’s Analytics’ analysis, Phoenix and Charlotte are overvalued by 46% and 33%, respectively.
Moody’s Analytics isn’t the only firm calling this an overvalued housing market. CoreLogic, a real estate research company based in California, provided an analysis to Fortune last month that found 65% of regional housing markets are overpriced. Meanwhile, an analysis provided by Black Knight, a mortgage technology and data provider, finds the typical American household would have to spend 31% of its monthly income to make a mortgage payment on the average-priced U.S. home. That’s the highest reading of Black Knight’s mortgage-payment-to-income ratio since 2007.
While CoreLogic and Moody’s Analytics agree the housing market is overvalued, CoreLogic isn’t quite as bearish. The real estate research firm says only 3% of housing markets have an “elevated” or “high” chance of seeing home price declines over the coming year. Nationally, CoreLogic expects home price growth to jump another 5% over the coming 12 months. That would mark a deceleration from the latest 12-month home price jump (19.8%); however, it would hardly be the relief home shoppers seek.
“New listings have not kept up with the large number of families looking to buy, leading to homes selling quickly and often above list price. This imbalance between an insufficient number of owners looking to sell relative to buyers searching for a home has led to the record appreciation of the past 12 months,” wrote Frank Nothaft, chief economist at CoreLogic, in a report published last month. “Higher prices and mortgage rates erode buyer affordability and should dampen demand in coming months, leading to the moderation in price growth in our forecast.”
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. It didn’t happen. Instead, the housing market boomed.