Nearly 14 years after the last housing bubble burst, inflated property values are about to face a brutal drop as rising mortgage rates and worsening affordability cool off the boom that sent home prices up by a staggering 34% over the past two years. According to the latest estimates, at least half of that gain can be lost this year as changing market conditions inevitably trigger a national home price correction. Homeowners are getting increasingly burdened by their loan payments, while first-time buyers simply can’t enter the market anymore. At this point, over 90% of the market is extremely overvalued, and experts are telling us that even a 10% crash would throw the U.S. economy into disarray.
According to the Moody’s Analytics proprietary analysis of U.S. housing markets, local income levels cannot support local home prices in 96% of housing markets across the country. This means that most local housing markets in the United States are currently at risk of a home price correction. Of the 392 metropolitan statistical areas the firm looked at, 376 are extremely overvalued. Among those 392 markets, 149 are overvalued by at least 25%, with the most overvalued being Boise, where home prices are 73% above what fundamentals would support.
On top of that, over the past two months, the average 30-year fixed mortgage rate has spiked from 3.11% to 5.48%. Considering today’s extremely inflated prices, a 10% crash in the most overvalued markets would be more than enough to push the U.S. economy over the edge. Worse than that, it could set off a national home price correction that would hamper the market’s growth for years, if not decades. However, the firm’s estimates indicate that prices will likely plunge by 15%, reversing the past two year’s gains by more than 50%.
Right now, the average mortgage payment is $1,800 a month, which is 70% higher than before the health crisis hit. The only other time home payments were as high as they are today was in 2007 – right on the eve of the 2008 bubble burst and the Great Financial Crisis. Today, loan-to-income levels are rising just as it happened back then. This imbalance makes defaults more likely. “When a correction occurs, and home prices drop, borrowers will start to be pushed underwater with unpaid loans more outstanding than the house’s value. They will walk away as millions of borrowers did in 2008 and 2009,” explains financial and economic writer Stephen Moore.
When the housing market peaks is like a runaway freight train without brakes. But when it runs out of power, things tend to derail very quickly. From one day to the other, multiple-offer listings become “for sale” signs that sit followed by price cuts. “Then, rather than chasing prices higher, prospective buyers wait to see how low price will go,” as highlighted by Investment Research Dynamics in a recent report.
The latest pulse reading is already showing signs of a major shift. The number of home sellers who dropped their asking price shot up to a six-month high of 15% during a four-week period ending on May 1 — up from 9% a year earlier. Given that most Americans live paycheck to paycheck and are already financially squeezed due to prices rising faster than paychecks, we can expect the downward trend for prices to accelerate from now on. The thing about bubbles is that they can only grow to a certain point before they break. And it is more than clear that we’re reaching a breaking point.
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