Fed Chairman Jerome Powell has made it clear: we are not seeing the US housing market normalize, we are. “Restart” through a “difficult correction”.
“In the longer term, what we need is for supply and demand to be better aligned so that house prices go up to a reasonable level and at a reasonable pace and for people to be able to buy a house again. Probably in the housing market we have to go through a correction to get back to that place,” Powell told reporters last week.
Essentially, the current real estate correction is pushing the US real estate market.—which had skyrocketed on the basis of historically cheap 3% mortgage rates— toward a new equilibrium against higher mortgage rates. Inventory levels will continue to rise and home sales will continue to fall, likely depressing home prices.
But it’s not a one-size-fits-all housing fix. Although mortgage rates have risen evenly across the country, the restart of housing prices varies significantly by market. In some regional real estate markets, the real estate boom of the pandemic as faded. Others seem to be going straight from the pandemic housing boom to the pandemic housing bust.
To better understand how the housing correction varies nationally, let’s take a look at the inventory data. Reading inventory data is pretty straightforward: If inventory levels are increasing, it means you’re moving quickly from the seller’s market to the buyer’s market.
See this interactive chart on Fortune.com
As the real estate market began to turn this summer, inventories finally soared. Nationally, inventory levels increased 53% between March and August.
While inventory levels are rising, they are still well below pre-pandemic levels: Nationwide, the amount of active quotes in August 2022 were 41.5% lower than August 2019. That makes some housing optimists think home prices won’t fall. After all, historically speaking, there is a stickiness in house prices. Sellers don’t like to discount deeply until the economy forces them to start cutting prices. That “economic force” is usually excess supply.
But here’s the thing: Tight inventory levels aren’t stopping home prices from falling. In July, US home prices posted their first monthly decline since 2012.
“Our view is that you’ll see, and we’re seeing it right now, that home prices will fall even though supply levels aren’t increasing,” says Rick Palacios Jr., head of research at John Burns Real Estate Consulting.
How can house prices fall even though there are not an oversupply nor an avalanche of distressed vendors? It boils down to pressurized affordability. The combination of higher mortgage rates— 6.82% as of Thursday-Y sparkling house prices they have pushed the new monthly mortgage payments far beyond what many buyers can financially bear. Cue the fall in house prices.
See this interactive chart on Fortune.com
For one thing, tight inventory levels are not stopping home prices from falling. On the other hand, the markets with the largest inventory spikes earlier this summer now have the steepest falls in house prices. Bottom line: We still need to pay close attention to inventory changes.
Markets with substantial spikes in inventory, over 150%, fall into one of two camps.
The first group are high-cost technology centers. Look no further than San Francisco (where inventory increased 378%) and San Jose (up 177%). The reason for its sharp correction is simple: not only are its high-end real estate markets more rate-sensitive, but so are its technology sectors.
The second group, and the largest, are the bubbling real estate markets. Being “overvalued” relative to underlying economic fundamentals it does not guarantee that house prices will go down. That said, in a housing recession, it is generally the significantly “overvalued” housing markets that are most at risk of sharp corrections. We’re seeing it now: In the last five months, inventory levels have skyrocketed in bubbling markets like Boise (where inventory is up 298%), Austin (up 435%), Phoenix (up 317%) and Las Vegas. Vegas (317% more). 192%).
Bubbling markets like Boise, Las Vegas, and Phoenix are not only changing fast, but also looking like real estate crashes on first innings. Let’s take a closer look.
See this interactive chart on Fortune.com
Even before pandemic stay-at-home orders were lifted, white-collar professionals who live in cities like San Francisco and Seattle in 2020 they were already taking off for getaways to the Mountain West. The poster child is Boise. Its outdoor lifestyle, tech scene, and relative affordability (at least for Californians) made it a go-to spot for techies working from home.
That was not well received by all the locals. Some people with California license plates even found cards printed on their windshields that read: “GO BACK TO CALIFORNIA, WE DON’T WANT YOU HERE.” It’s easy to see why some locals were frustrated: The pandemic housing boom, during which Boise home values soared more than 50%, kept many Boise residents from buying homes. According to moody’s Analytics, Boise is actually the most “overvalued” top real estate market in the country:with house prices trading 72% higher than underlying fundamentals would normally support.
Fast-forward to September, and that Boise boom is long gone. This summer, Boise’s inventory soared 297% while home value fell 5.3%. That fix is far from over. Industry experts tell Fortune there is a glut of new construction in Boise coming to market soon. If no buyers are found, prices for those homes could fall further.
See this interactive chart on Fortune.com
There is no doubt: Opendoor —national housing iBuyer—is taking heavy losses on some of its recent “changes.” The epicenter of those losses could be Las Vegas.
an example is This house in North Las Vegas that Opendoor bought for $540,800 in May. Just a few weeks later, Opendoor put the house on the market for $581,000. However, he obviously didn’t get many bites. Until Thursday, the list price was up to just $490,000. That’s 10.4% below what Opendoor paid for the house this spring.
Las Vegas continues to change fast, historically fast. Between March and August, Las Vegas inventory increased 192%. While Las Vegas home values, which are lagging, are it is already down 3% from its 2022 peak.
See this interactive chart on Fortune.com
In the early 2000s, home flippers were targeting fast-growing sunbelt cities like Phoenix. That speculation finally worked against Phoenix once the housing bubble burst in 2008. See, when the housing cycle “turned around,” those investors were the first to run for the exits. That inventory buildup, of course, only put further downward pressure on Phoenix.
Fast-forward to today, and Phoenix is once again at the center of a cooling real estate market: Between March and August, Phoenix inventory jumped 317%. That is already translating into a sharp drop in house prices. According to ZillowPhoenix home values are 4.4% less than its 2022 peak.
Moody’s Analytics Chief Economist Mark Zandi expects home prices to be in significantly “overvalued” real estate markets like Boise, Phoenix and Las Vegas. drop 10% to 15% between peak and valley. But that does not mean a recession. If an economic downturn hits the nation, Zandi says price markets like Boise, Las Vegas and Phoenix could decrease from 20% to 25%.
See this interactive chart on Fortune.com
Let’s be clear: not all US real estate markets are changing like Boise, Phoenix and Las Vegas.
In the Greater New York metropolitan area, rising mortgage rates certainly weighed on the market; however, year-over-year inventory remains low. And according to Zillow, Home values in the New York metro area only fell 0.2% between May and August.
The reason? Unlike the bubbling markets to the south and west, New York is not so detached from underlying fundamentals. According to Moody’s Analytics, Las Vegas and Phoenix are “overvalued” by 53.3% and 53.8%, respectively. Weather Greater New York is “overvalued” by only 7.4%.
In a nutshell: the home correction in progress is teaching us that the fundamentals of housing are still important.
Want to stay up to date on the changing US real estate market? Follow me in Twitter a @NewsLambert.
This story originally appeared on fortune.com
