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Recession Could Cause Double Digit Price Declines in Overvalued Markets, Experts Say

Housing Markets

Recession Could Cause Double Digit Price Declines in Overvalued Markets, Experts Say

Overvalued markets may have reached their tipping point, and a recession could put a damper on fast-rising home prices

June 13, 2022
Traffic on freeway into Boise, Idaho
Image: Stock.adobe.com

While current market conditions may not create the same housing bubble and bust scenario that rattled the U.S. economy in 2008, a number of regional markets are just as overvalued as they were at the peak of home sales activity over a decade ago, Fortune reports. National house prices were considered “overvalued” by 24.7% in the first quarter of 2022, while local incomes mostly stayed the same. 

Skyrocketing home prices are quickly outpacing wage growth all across the U.S., but a recession could drive down prices and even out a disproportionate price to income ratio, experts say. According to Moody's Analytics chief economist Mark Zandi, overvalued markets like Boise and Charlotte could see 5% to 10% home price declines in the next 12 months, but a recession could cause price drops of 15% to 20%.

Among the 413 regional housing markets measured by Moody's Analytics, the firm deems 96% are "overvalued." Simply put: Nearly the entire country has house prices that are higher than underlying fundamentals would historically support.

Among the markets analyzed by Moody's Analytics, 183 are "overvalued" by more than 25%. That's up from 150 regional housing markets it deemed "overvalued" by more than 25% in the fourth quarter of 2021. The most "overvalued" markets are concentrated in fast-growing cities in the Mountain West and Sun Belt that benefited from the nation's WFH boom. That includes both Boise ("overvalued" by 72%) and Charlotte ("overvalued" by 66%).

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