U.S. real estate fell into what is commonly called a “housing recession” shortly after mortgage rates soared earlier this spring. This indicates a significant decline in housing-related activity, such as home sales. That shouldn’t come as much of a surprise, given that housing downturns have historically followed Federal Reserve efforts to combat inflation.
Recessions in the housing market are very common, but price drops for existing homes are much less so. For this reason, housing bulls, much like they did in 2006, have refused to accept the idea that home values could go down. Once again, though, they are completely wrong.
Real Estate Housing Market Crash In 98 Major Housing Markets
John Burns Real Estate Consulting provided data this summer suggesting that overheated housing cities like Boise and Phoenix had already seen their home price peaks blown off. Now it appears that the cooling of the Western housing market bubble has spread to other regions.
John Burns Real Estate Consulting tracks 148 key regional housing markets across the United States. In 98 of those locations, home values have dropped since their 2022 highs. The Burns Home Value Index* has fallen by more than 5% in 11 areas. The decline in property values in the United States is deeper and more reaching than was first believed.
According to Rick Palacios Jr., chief of research at John Burns Real Estate Consulting, said, “our view is that you will see—and we’re seeing it right now—home prices will fall even while supply levels are not blasting higher.”
In 2005, when the previous housing cycle ended, home prices didn’t start falling until there was a dramatic increase in available homes for sale. Despite inventory levels being 41.5% below pre-pandemic levels, housing prices are decreasing this time around. Where do you even begin to explain that? Mortgage rate hikes and unprecedented home price increases are to blame for the current housing market frenzy. Currently, there is a backlash from purchasers.
In several regions across the country, Palacios predicts home values will decrease by double digits as a result of rising mortgage rates.
The hardest damaged home markets can be divided into two categories: those with a lot of foreclosures and those with a lot of short sales.
First, we have expensive tech centers. Indeed, property values have fallen most sharply in San Francisco (down 8.2 percent from their 2022 peak), San Jose (down 8.2 percent), and Seattle (down 7.8 percent). Their high-end real estate and technology markets are both more rate sensitive than those of the United States.
The second set consists of overheated markets including Austin (-3.5%), Boise (-3.5%), Phoenix (-5.3%), and Reno (-5.3%). Markets like Austin and Phoenix saw property prices soar well above what local wages could sustain because of the pandemic housing boom. It has been determined by Moody’s Analytics that Boise is “overvalued” by a whopping 72%. Historically, when the housing market “rolls over,” the hardest hit areas are those where homes are excessively priced.
While 98 markets have seen significant declines from their peaks, another 50 markets have yet to see a decline from their 2022 highs. The majority of these markets are found in Eastern seaboard countries. Newark and Louisville are two examples of cities that had less dramatic price increases during the Pandemic Housing Boom. The state of Florida, home to eleven of these markets, showed remarkably strong resilience over the summer.
But just because housing prices haven’t fallen in a certain market yet doesn’t indicate they never will. John Burns Real Estate Consulting has been forecasting that U.S. home prices will fall in both 2023 and 2024 since May, so we may still be in the early innings of the home price correction.
Moody’s Analytics projects a peak-to-trough drop in U.S. home values of up to 5%. Moody’s Analytics forecasts a fall of 5-10% in “overvalued” home markets. That forecast presupposes there will be no economic downturn. Moody’s Analytics forecasts a 5%-10% drop in home prices across the country if a recession materializes. During a recession, home prices typically decline by 15% to 20% in “overvalued” property markets.
If you’re worried about a potential housing market crash, know that experts agree the housing market is not a bubble about to burst.
Connect with us for your real estate needs! pic.twitter.com/SKrEjdqO1e— Merritt RE Prof (@merrittreprof) August 8, 2022
Zonda and Zelman & Associates are just two of the many research firms that have come forward to forecast declining U.S. home values. However, no one expects home prices in the United States to fall as far as they did during the last housing collapse. Between their 2006 high and 2012 low, housing prices in the United States plummeted by 27%.
Even if our forecasts are correct and prices do decline double digits in some of these markets over the next few years, we are only going to be resettling the market.
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