Redfin: These housing markets are most at risk of falling home prices

Homebuyers had enough. Spiking mortgage rates in addition to record home price appreciation—up to 42% since the start of the pandemic—pushed monthly mortgage payments to a level that is simply unaffordable for tens of millions of prospective homebuyers. As more shoppers take a rain check, housing market correction it just gets more intense.

This week, we learned that year after year, Mortgage purchase applications drop 18%. Weather New home sales are down 17%Y Single-family homes started have dropped 16%.

Even as housing transactions plummetwe have not yet returned to a balanced market. Inventory levels are still a staggering 49% below July 2019 levels, giving most sellers, at least for now, enough leverage to avoid selling below market benchmarks achieved earlier this year. That said, as inventory levels continue to rise, it is possible that some regional housing markets may actually experience year-over-year declines in home prices in 2023.

On Friday, Redfin released its “risk score,” which identifies housing markets that are most at risk of a “housing downturn.” The higher a market’s “risk score,” the greater the likelihood that the market could see a year-over-year decline in home prices. In total, Redfin analyzed 98 regional housing markets and evaluated factors including home price volatility, average debt-to-income ratio and home price growth.

Among the 98 markets measured by Redfin, Riverside was most likely to experience a “housing recession.” Boise, Cape Coral, North Port, Las Vegas, Sacramento, Bakersfield, Phoenix, Tampa and Tucson followed.

“Popular Migration destinations where home prices have skyrocketed during the pandemic, including Boise, Phoenix and Tampa, are more likely to see the effects of a housing recession amplified, with home prices declining year over year if the economy enters a recession, a scenario some economists think looks likely as inflation persists and stock markets falter. Homeowners in those areas they are considering selling may want to list their homes soon to avoid potential price drops.” Redfin researchers write.

Sellers least likely to see prices fall? Redfin says Akron. Not far away are markets like Philadelphia, El Paso, Cleveland and Cincinnati. As the pandemic real estate boom took off, homeowners in those locations experienced lower investor activity and more modest levels of home price growth. In the midst of the boom, homeowners in places like Akron surely had FOMO as they watched their peers in Austin and Boise experience exorbitant levels of home price growth. But now homeowners in markets like Akron and Cleveland are probably thankful: Historically speaking, the largest real estate corrections tend to occur in the fastest growing markets.

“Relatively affordable northern metropolitan areas, several of them in the Rust Belt, such as Cleveland and Buffalo, are more resilient in the event of a recession. Prospective homebuyers in those areas can go forward with confidence that they are less likely to look at home values. reject,” Redfin researchers write.

Every quarter, Moody’s Analytics calculates an “overvalued” or “undervalued” figure for some 400 markets. The firm aims to find out if fundamentals, including local income levels, could support local house prices. It’s only worrisome when a real estate market becomes significantly “overvalued.” The bad news? In the first quarter of 2006, the average US housing market was “overvalued” by 14.5%. In the first quarter of 2022, Moody’s estimates that the median regional real estate market was “overvalued” by 23%.

Simply being detached from underlying economic fundamentals does not guarantee that a market will see home prices fall. However, as a market becomes significantly “overvalued,” the chances of falling house prices increase if a housing correction and recession occur. moody’s Chief Economist Mark Zandi says Fortune that real estate markets “overvalued” by more than 25% probably see 5% to 10% drops in home prices. If a recession comes price drops could be as large as 15% to 20% in those markets.

We are already seeing “bubbly” markets like Boise and Austin experiencing the fastest corrections. Just look at the inventory. In the last six months, inventory levels have increased 161% and 220% in Boise and Austin, respectively.

Earlier this month, John Burns Real Estate Consulting said Fortune that Boise is poised to be the first housing market to see prices drop year over year. The real estate research company predicts it could arrive in December. For that to happen, Boise home prices would not only have to erase all of their spring 2022 gains, but also fall below their December 2021 price.

“You could argue that in many real estate markets the last 10% of home price appreciation was purely aspirational and irrational, and that will get over very quickly,” said Rick Palacios Jr., director of research at John Burns Real Estate Consulting. “That’s exactly what we’re all seeing right now.”

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