US Housing Market Overvalued in 88% of Metropolitan Areas

The US housing market is showing signs of a bubble, with Fitch Ratings estimating that 88% of metropolitan statistical areas (MSAs) had overvalued home prices in the second quarter of 2023. This is a significant increase from the 72% of MSAs that were overvalued in the first quarter of 2023.

Top Three Overvalued MSAs:

The top three overvalued MSAs were Charleston-North Charleston, SC; El Paso, TX; and Camden, NJ. These MSAs had home prices that were more than 20% above their estimated intrinsic values.

Fitch Ratings expects the trend of overvalued homes to continue in 2024 and 2025. Several factors are contributing to this, including:

• Rising mortgage rates: As mortgage rates increase, it becomes more expensive to buy a home. This can lead to a decrease in demand and a drop in home prices.
• Stagnant housing supply: The supply of new homes has not kept up with demand in recent years. This has led to a shortage of homes on the market, which can drive up prices.
• Anticipated increase in the federal funds rate by the Federal Reserve: The Federal Reserve is expected to raise the federal funds rate in 2024 and 2025. This will make it more expensive for banks to borrow money, which could lead to higher mortgage rates.

The overvaluation of the US housing market is a cause for concern. If home prices were to fall, it could lead to a wave of defaults and foreclosures. This could have a negative impact on the economy as a whole.

It is important to note that not all MSAs are equally overvalued. Some MSAs, such as San Francisco and New York City, have a history of high home prices and may be less vulnerable to a correction. However, other MSAs, such as those in the Sun Belt, are more likely to see a decline in home prices if the market were to correct.

If you are considering buying a home, it is important to do your research and make sure that you are not paying too much. You should also consider getting a pre-approved mortgage so that you know how much you can afford to borrow.

Tips for Buyers in an Overvalued Housing Market

Navigating the US housing market right now feels like sailing through a storm. With 88% of MSAs deemed overvalued, many buyers are understandably hesitant. But don’t despair! Even in choppy waters, there are still strategies to consider:

1. Assess your needs and priorities:

• Essential versus aspirational: Before diving in, determine if buying a home is a need or a want. If it’s essential, be willing to compromise on size, location, or amenities compared to your dream home.
• Long-term commitment: Remember, buying a home is a long-term commitment. Can you afford the potential for a correction in your chosen market? Can you handle staying put for several years if prices dip?

2. Do your research, then research some more:

• Know your market: Deeply research the specific MSA you’re interested in. Analyze historical trends, price-to-income ratios, and inventory levels. Is it a Sun Belt boomtown susceptible to a sudden correction, or a coastal metro with limited supply offering more stability?
• Compare and contrast: Look beyond your desired neighborhood. Are there nearby areas offering better value or more room for negotiation? Research different housing types, including condos, townhomes, or fixer-uppers, to expand your options.

3. Be a savvy negotiator:

• Don’t overpay: Arm yourself with data and comparable listings to ensure you’re offering a fair price. Be prepared to walk away if the seller isn’t budging.
• Contingencies are your friends: Consider contingencies that protect you if unforeseen circumstances arise, like job loss or market changes.

4. Seek professional guidance:

• Work with a qualified real estate agent: A good agent can provide valuable insights into the market, negotiate on your behalf, and guide you through the complexities of the buying process.
• Talk to a financial advisor: Discuss your budget, affordability, and potential mortgage options. Getting pre-approved before house hunting can strengthen your offer and avoid disappointment later.

Remember: The housing market is cyclical. Overvaluation won’t last forever. By prioritizing your needs, doing your research, and being patient, you can still find a safe harbor in this turbulent market.

With careful planning and strategic maneuvering, you can still navigate the stormy US housing market and find your dream home, even in these overvalued times.

Sources:

• https://www.fitchratings.com/research/structured-finance/homes-prices-remain-overvalued-in-88-of-us-20-12-2023