Real estate economists have a name for what we are seeing now: a “reversed” real estate cycle. It means that the expansion of housing, which began in 2011, has been replaced by a downward slide. That said, just because real estate activity is declining doesn’t guarantee that home prices will fall too. On paper, the housing crash of 2008 is an anomaly. Historically speaking, house prices are incredibly sticky. Home sellers hold on to the price they have in their heads for as long as possible. Even during most recessions, house prices go up, not go down.
When the real estate cycle “turns upside down” is it logical to ask whether the real estate market is headed for another historical anomaly (eg falling house prices) or the historical norm (eg rising house prices)?
To find out, Fortune contacted Moody’s Analytics to get access to its latest owner housing analysis. Researchers from the financial intelligence firm calculated how house prices are likely to move in 414 regional real estate markets between the fourth quarter of 2022 and the fourth quarter of 2024.
The find? Among the 414 largest real estate markets in the nation, Moody’s Analytics forecasting model predicts that 210 markets are poised to see a decline in home prices over the next two years. While 204 markets are poised to see a rise in house prices over the next two years.
Moody’s Analytics forecast model predicts The Villages in Florida is poised to see the biggest drop in home prices. Between the fourth quarter of 2022 and the fourth quarter of 2024, Moody’s Analytics predicts that house prices in The Villages will drop 12.8%. Not too far behind, Punta Gorda, Florida (-11.4% expected drop in house prices); Spokane, Washington (-9.4%); Cape Coral, Florida (-9.4%); Ocala, Florida (-9.3%); City of Lake Havasu, Arizona (-9%); Fort Lauderdale, Florida (-8.6%); Reno (-8.2%); Missoula, Mont. (-7.7%) and Palm Bay, Florida (-7.6%).
Most of these markets at risk of falling house prices are also the places that have seen the greatest appreciation in house prices in the past two years. Now, they are simply more vulnerable to a homebuyer riot. Meanwhile, markets in Florida, where residential construction soared during the pandemic, are now at high risk of oversupply. If Florida home builders can’t dump their unsold homes, it could lead to temporary oversupply.
Of the 414 markets analyzed by Moody’s Analytics, Albany, Georgia is expected to see the biggest jump in home prices in the next two years. Between the fourth quarter of 2022 and the fourth quarter of 2024, Moody’s Analytics predicts that house prices in Albany will increase by 9.8%. Just behind Albany are Casper, Wyo (8.0% expected growth in house prices); New Bern, NC (7.6%); Rocky Mount, NC (7.3%); Augusta, Georgia (7.2%); Hartford, Connecticut (7.1%); Columbus, Georgia (6.6%); Farmington, New Mexico (6.5%); Valdosta, Georgia (6.4%) and Danville, Illinois (6.3%).
The pandemic housing boom has seen the US real estate market historically go from an affordable real estate market to a historically inaccessible market in just 24 months. Ultimately, this is the main reason 210 markets are vulnerable to falling house prices.
Each quarter, Moody’s Analytics conducts an analysis to determine whether home prices in regional real estate markets can be supported by underlying economic fundamentals such as local income levels. The last reading was not good. During the first quarter of 2022, Moody’s Analytics estimates that national house prices are “overvalued” by 24.7%. This means that US home prices are now the most detached from fundamentals since the housing bubble.
Simply being “overvalued” does not guarantee that a housing market will see house prices fall. However, the more “overvalued” house prices become, the more likely the market is to see a price correction once the housing cycle “turns around”. Of course, the fact that the housing cycle has finally “turned around” is why some economists suddenly speak of the prospect of regional price corrections.
In particular, markets such as Boise (which is “overvalued” by 73%) and Phoenix (which is “overvalued” by 46%) are particularly vulnerable to falling house prices. Those markets have not only priced many locals, but their high price tags have also become a deterrent to people considering moving there.
Moody’s Analytics isn’t the only company to predict that some regional real estate markets could see home prices fall. Among the 392 largest markets in the nation, CoreLogic estimates that 98 markets have a “high” or “very high” probability of seeing a decline in house prices in the next year.
But even if some regional real estate markets are seeing house prices fall, it doesn’t mean we’re headed for a national slump. Neither Moody’s Analytics nor CoreLogic predict a decline in domestic house prices. Unlike 2008, homeowners are in better financial shape this time around. Not to mention the shady subprime mortgages that nearly brought the financial system to the brink in 2008 have been banned.
Bill McBride, author of the blog Calculated Risk, tells it Fortune believes that expanding pandemic markets such as Phoenix and Boise, where home prices rose about 60% during the pandemic, could see home values drop by about 5% and 10% over the next year. But that wouldn’t be the end of the world, says McBride.
“So what? You’re still up 50%,” says McBride.
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