The US housing market is recovering. At least that’s according to Moody’s Analytics.
In May 2022, Mark Zandi, chief economist at Moody’s Analytics, made a bold announcement for luckNot only has the housing market peaked, but a correction in the housing sector is coming soon. At the time, Zandi predicted that national home prices would stabilize while home prices in frothy housing markets like Boise and Austin would drop 5% to 10%.
Reason behind the call: Zandi said last spring that the pandemic housing boom has caused house prices in most markets to decouple from fundamentals like local income. In fact, Moody’s Analytics estimates that, in the second quarter of 2022, the US housing market is “overvalued” by 26.98%. That was higher than the housing bubble era peak of 22.22% in the fourth quarter of 2022, and well above the “overcharge” of 2.17% in the second quarter of 2018. *
Fast forward to spring 2023, and the underlying fundamentals are really getting better. For one thing, Zandi was right — the housing market slipped into a correction in the second half of 2022, and prices in frothy markets like Austin and Boise are down about 10%. Falling home prices in overheated markets, along with rising household incomes, also mean that the housing market for spring 2023 isn’t as “overvalued” as spring 2022.
In fact, an updated analysis by Moody’s Analytics found that the US housing market was “overvalued” by just 16.85% in the first quarter of 2023 — an improvement of about 10 percentage points from the second quarter of 2022. Even Boise, which was ” Overvalued” by 71.48% In the second quarter of 2022, the level of “overvalued” decreased to 54.02%. (The interactive graph below shows Moody’s “overvalued” or “undervalued” results for the country’s 440 largest markets between the first quarter of 2000 and the first quarter of 2023.)
Will housing market fundamentals continue to improve in the first quarter of 2023? Housing economists, who have been watching home prices rise this spring in most regional markets, are somewhat divided on the matter.
Companies like CoreLogic and Zillow predict that tight inventory levels will push up national home prices 4.6% And 4.8%, respectively, over the next year. If these bullish projections come true, housing fundamentals will indeed stop “recovering”.
However, if the Zandi is right, the “overvalued” levels will continue to fall. With mortgage rates still rising in 2022, Zandi revised his outlook downward. In October 2022, project national peak-to-trough home prices to decline by about 10% with a projected bottom in 2024 or 2025. (Moody’s Analytics model predicted a national decline of 8.6% from peak to trough, including 4.4% in 2023 alone.)
For Zandi to be right, the overheated regional housing markets will need to shift back into a “correction pattern” during the seasonal slow months later this year.
Of the 404 largest markets tracked by Moody’s Analytics — the financial intelligence arm of credit rating giant Moody’s — 17 are “undervalued.” This includes markets like Chicago and Baton Rouge. It also includes San Francisco, which was hit hard by the housing correction in the second half of 2022.
Meanwhile, 387 of the nation’s 404 largest markets are “overrated.” This includes 157 markets that Zandi describes as “significantly overvalued” – meaning they are “overvalued” by more than 25%. At the height of the boom in the second quarter of 2022, 195 markets fell into this camp. These markets, including places like Nashville (“overvalued” by 46.66%), Tampa (“overvalued” by 37.56%) and Austin (“overvalued” by 36.62%) are most at risk of falling home prices, Zandi says.
Keep in mind that just because the housing market is “overvalued” doesn’t mean that housing prices there will go down. Historically, housing markets can remain “overpriced” for years, and when fundamentals improve, it is often through rising incomes – not falling home prices.
*According to Zandi: “A metric of Moody’s Analytics housing valuation is the percentage difference between actual house prices and house prices historically consistent with a person’s wages and salaries and construction costs. A house’s price is ultimately determined by the value of the land on which it resides, which is related to its opportunity cost For land measured in wages and salaries, the cost of building a home.Nationally, about half of a home’s value is land and the other half is structure, but this varies greatly across the country.In San Francisco, for example, land is the largest part of a home’s value Far away, while in Des Moines, Iowa, the opposite is true. Our home valuation metric accounts for these differences.”