Redfin: These real estate markets are the most at risk of falling house prices

Homebuyers had had enough. Rising mortgage rates plus record appreciation in home prices, up 42% since the start of the pandemic, has pushed monthly mortgage payments to a level simply unattainable for tens of millions of would-be buyers. As more and more buyers take a rain check, the correction in the housing market only becomes more intense.

This week we learned that mortgage applications are down 18% year-on-year. While new home sales fell 17% and single-family housing startups fell 16%.

Even as real estate transactions collapse, we have not yet returned to a balanced market. Inventory levels remain a staggering 49% below July 2019 levels, giving most sellers, at least for now, enough leverage to hold sales below the market comps achieved at the start of this. year. That said, as inventory levels continue to rise, it’s possible that some regional housing markets may actually see home prices declining year over year in 2023.

On Friday, Redfin released its “risk score”, which identifies housing markets that are at the highest risk of a “housing downturn”. The higher a market’s “risk score”, the greater the likelihood that the market will see a year-over-year decline in home prices. In total, Redfin surveyed 98 regional real estate markets and evaluated factors including house price volatility, average debt-to-income ratio and house price growth.

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

“Popular migration destinations where house prices soared during the pandemic, including Boise, Phoenix and Tampa, are more likely to see the effects of a housing recession amplified and house prices will decline year after year if the economy enters. in a recession, a scenario some economists believe likely as inflation persists and stock markets stumble. Homeowners in those areas they are considering selling may want to put their homes up for sale soon to avoid potential price falls. ” , the Redfin researchers write.

Are sellers less likely to see prices go down? Redfin says Akron. Not too far behind are markets like Philadelphia, El Paso, Cleveland and Cincinnati. As the pandemic housing boom took off, homeowners in those places saw less investor activity and more modest levels of home price growth. In the midst of the boom, homeowners in places like Akron definitely had FOMO as they watched their peers in Austin and Boise experience exorbitant levels of home price growth. But now homeowners in markets like Akron and Cleveland are probably grateful: Historically speaking, the sharpest real estate corrections usually come in the fastest growing markets.

“Relatively affordable northern subways, many of them in the Rust Belt, such as Cleveland and Buffalo, are more resilient in the event of a recession. Potential homebuyers in those areas can move forward with the confidence that they are less likely to see values. of homes decline, “write the Redfin researchers.

Each quarter, Moody’s Analytics calculates an “overvalued” or “undervalued” figure for approximately 400 markets. The company’s goal is to find out if fundamentals, including local income levels, could support local house prices. It is only worrying when a housing market becomes significantly “overvalued”. The bad news? In the first quarter of 2006, the average US housing market was “overvalued” by 14.5%. In the first quarter of 2022, Moody’s estimates that the median regional real estate market was “overvalued” by 23%.

Simply detaching from underlying economic fundamentals does not guarantee that a market will see house prices plummet. However, when a market becomes significantly “overvalued,” it increases the odds of falling house prices if they hit both a housing correction and a recession. Moody’s chief economist Mark Zandi says so Fortune that “overvalued” housing markets by more than 25% are likely to experience a drop in house prices from 5% to 10%. If a recession occurs, price drops in those markets could be as high as 15% to 20%.

We are already seeing “sparkling” markets such as Boise and Austin seeing faster corrections. Just look at the inventory. In the past six months, inventory levels have increased 161% and 220% in Boise and Austin, respectively.

Earlier this month, John Burns Real Estate Consulting said Fortune that Boise is poised to be the first real estate market to experience year-over-year price declines. The real estate search firm predicts it could arrive as early as December. For that to happen, home prices in Boise should not only wipe out all spring 2022 gains, but also drop below the December 2021 price.

“You could strongly argue that in many real estate markets the last 10% of home price appreciation was purely ambitious and irrational, and that will come out very quickly,” Rick Palacios Jr., head of research at John Burns Real Estate Consulting “This is exactly what we are all seeing right now.”

Do you want to stay updated on housing correction? Follow me on Twitter at @NewsLambert.

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