Home News These 210 bubbly housing markets could crash 25% to 30%

These 210 bubbly housing markets could crash 25% to 30%

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No PhD required.PhD in Economics from the University of Chicago to Understand It 7% Mortgage Rates Threaten US Housing Market.

we’ve already seen it. On Tuesday, we learned that mortgage purchase applications were down 13% last week. This is a sharper drop than his 1.1% drop seen last week. difference? Last week’s 13% decline in mortgage purchase applications First weekly 7% mortgage rate reading since 2002.

Certainly, historically speaking, 6% or 7% mortgage rates aren’t out of the ordinary.However, the percentage of figures overlooks the impact of The ongoing mortgage interest rate shock: These rates, combined with bubbled home prices, put new monthly payments at the high end of history. Considering income, it’s more expensive to buy now than it was during the height of the housing bubble in the 2000s.

this Rising Affordable Crunch Economists and housing analysts have already lowered their outlook for US house prices.Look no further Moody’s analysis.

In August, Moody’s Analytics expects US house prices to fall between 0% and 5%.in September, Moody’s Analytics cut its outlook to a 5% to 10% decline nationwide.However, it lowered that forecast significantly again on Wednesday. Looking ahead, Moody’s Analytics expects US home prices to fall 10% from peak to trough.

“Affordability has evaporated, and with it the demand for housing,” said Mark Zandy, chief economist at Moody’s Analytics. luck“I feel like prices have become a lot less sticky [right now] than they have historically.back to the fact they ran so fast [during the pandemic], and sellers are looking to rapidly reduce prices here in order to close the deal. ”

Moody’s Analytics baseline forecast does not assume a recession. Moody’s Analytics now expects US home prices to fall between 15% and 20% from peak to trough if a recession materializes.it’s not that far 27% decline in U.S. home prices from 2006 to 2012.

View this interactive chart on Fortune.com

When groups like Moody’s Analytics say “U.S. housing market” or “U.S. housing prices,” they are talking about the overall view of the country. In the eyes of Moody’s Analytics, that will be especially true going forward.

of A ‘severely overvalued’ housing market, Moody’s Analytics now expects home prices to fall between 15% and 20%. If a recession hits, Moody’s Analytics expects US home price declines to widen from 25% to 30% in the “massively overvalued” housing market.

These so-called ‘massively overvalued’ markets are everywhere, not just in some parts of the country.

Every quarter, Moody’s Analytics assesses whether local fundamentals, including local income levels, can support local home prices. through the second quarter of the year210 housing markets, including Boise (77% “overvalued”) and Las Vegas (60% “overvalued”), fell into its “significantly overvalued” camp.

View this interactive chart on Fortune.com

When Housing market goes into recession— A period of declining levels of home sales and home construction — usually bubbled or bubbled housing market This is the region most at risk of falling housing prices.

That explains why this ongoing housing recession has triggered so quickly. house price correction: very foamy on the way pandemic housing boomEvidence of . Back in the second quarter of 2019, Moody’s Analytics considered only three regional housing markets to be “significantly overvalued.”

View this interactive chart on Fortune.com

Companies like Moody’s Analytics aren’t going bearish just because mortgage rates hit 7%. Instead, they’re fixing their outlook. This is because financial markets are suggesting that 6% or 7% mortgage rates could last longer than expected. As long as mortgage rates remain high, Zandi says it will put significant downward pressure on these bubbled home prices.

Over the next six months, Zandi expects mortgage rates to be around 6.5%. This is up from his previous outlook of 5.5%.

What’s Happening in the Mortgage Market? Well, a lot.

Although the Federal Reserve does not directly set long-term rates like it does mortgage rates, expectations about where the Fed will set future short-term Influences the way interest rates are determined. In recent months, financial markets have concluded that the Fed is unlikely to reduce its inflation war in the near term. Of course, this means that short-term interest rates will rise in the long run. Indicates upward pressure on long-term interest rates, such as mortgage rates.

But that only explains part of the rise in mortgage rates. There are many others.

In recent months, we’ve seen what Zandy calls an “abnormally large gap between mortgage and Treasury rates.” Historically speaking, 10-year Treasury yields and mortgage rates have been linked. Mortgage rates are trading four standard deviations above what Treasury yields have historically suggested and are now busted. Zandi says it comes down to prepayment risk. Investors believe 2022 mortgage borrowers will refinance to lower interest rates in the future. Financial markets have put upward pressure on mortgage rates to adjust for so-called prepayment risk.

View this interactive chart on Fortune.com

Let’s be clear: This adjustment in house prices started months ago. In some parts of the country, the fix is ​​already pretty steep.

Which housing market is changing the fastest? will see the biggest corrections merry market like Austin (House prices fell 7.4% between May and August), Boise (down 5.3%) and Phoenix (down 4.4%). All of these markets were flooded with investor activity and work-from-home buyers during the pandemic.Home prices were much higher in these places What local income has historically supported.

* “The Moody’s Analytics home valuation metric is the percentage difference between actual home prices and home prices that historically match per capita wages and salaries and construction costs. A home is ultimately determined by the value of the land on which it resides, which is tied to the opportunity cost of land, measured in wages and salaries, and the cost of building a home. Half is the land and the other half is the structure, but this varies quite a bit from country to country.For example, in San Francisco the land makes up the majority of the value of a home, while in Des Moines Iowa it’s the opposite. home valuation index accounts for these differences,” wrote the chief economist at Moody’s Analytics. Mark Zandy.

This story was originally Fortune.com

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