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Why Some Housing Markets Seem To Be Cooling Down While Others Heat Up

Fueled by a red-hot housing market, some frustrated homebuyers may have hoped sky-high listing prices would finally come crashing down. Well, they kind of are. It just depends on where you live.

To better understand the housing affordability situation, Fortune The magazine reached out to Moody’s Analytics for access to the latest analysis of its own housing. Researchers at the financial intelligence company calculated how home prices in 414 regional housing markets could change between the fourth quarter of 2022 and the fourth quarter of 2024.

Among the nation’s 414 largest housing markets, according to Moody’s Analytics forecasting model, 210 markets are on the verge of declining home prices in the next two years, and 204 markets expect home prices to rise in the next two years. The prospect of a significant fall in house prices is becoming more likely as home sellers succumb to mounting affordability pressures brought on by June’s rapid rise in mortgage rates.

Nationwide, home prices rose 18.3% year-over-year in June 2022 from June 2021, marking the 125th consecutive month of year-over-year gains, according to data analytics provider CoreLogic. While the annual gain was still strong, it slowed from the previous month for the second month in a row, reflecting a decline in buyer demand due in part to higher mortgage rates and concerns about a slowing economy.

Lawrence Yoon, a chief economist for the National Association of Realtors, notes that housing markets that have experienced rising prices may be at a critical juncture.

“What I can say is that those markets that have grown have been driven by strong local job creation and new residents moving into those areas, including as retirees,” he said.

“So in places like Phoenix and Tampa and Boise, you may or may not see significant price reductions. They may also be braced for further price increases.”

Yoon added: “I can’t say given such an extraordinary rise in prices in such a short period of time. But even if prices were to fall in these markets, it wouldn’t hurt the local economy, given the good housing conditions of many local homeowners who bought years ago. Even some renters may want to go back to buying if the price comes down.”

He said he would be more concerned that housing markets will be able to weather the storm where there is no job growth and if they are losing remote workers elsewhere.

“For high-wage white-collar workers, telecommuting is a big financial boon,” said Redfin Senior Economist Sheharyar Bokhari. “It allows them to move from tech hubs like San Francisco to more affordable parts of the country like Boise or Salt Lake City, get more home for their money and save for a rainy day. This could backfire on local residents in these areas, particularly renters who are on the sidelines as house prices soar while their incomes remain largely flat.”

“Phoenix and Miami have some of the highest rates of inflation in the country, partly because of skyrocketing home prices,” Bokhari added. “This will end up reducing the financial benefits of moving to these places for out-of-towners. High inflation also squeezes the budgets of local residents, who spend more on things like food and fuel and save less for a possible down payment.’

Home prices rose more than twice as fast as homebuyer incomes in Boise, Idaho, rising 53% to $485,000 between December 2019 and December 2021, according to a Redfin analysis of mortgage data. Prices rose 48% in Austin, Texas, and Cape Coral, Florida. ​​​​​​​Even as local incomes rose and home prices soared in 2021, housing markets in many of those cities booming from the pandemic are faltering as high mortgage rates and unsustainable price growth dampen demand.

Redfin reports that Boise, Austin, Cape Coral, Phoenix, North Port, Fla., and Tacoma, Wash., are among the 20 housing markets that cooled the fastest in the first half of 2022. Miami, Stockton, Calif. and Salt Lake City are among the 25 housing markets most susceptible to lower home prices if the U.S. enters a recession. But while they are prone to recession-induced downturns, these places are unlikely to experience a housing market crash because homebuyers have relatively high incomes.

“People are still moving out of California, and they still have enough money to buy nice homes in desirable neighborhoods, sometimes for a lot of money,” said Austin Redfin agent Gabriel Recio. “But the days of homes selling for 25% above asking price with multiple offers are over. Now, when mortgage rates are rising, and there are rumors of a slowing housing market, buyers are not so eager. Local buyers – and even out-of-town buyers – now have the opportunity to take their time and buy a home at or even below asking price.”

Selma Hepp, interim chief of CoreLogic’s office of chief economist, believes that the markets that Moody’s model predicts will experience the most declines in home prices are the same markets that CoreLogic’s market indicators model shows as extremely overvalued.

“These markets have seen significant increases in home prices compared to what the local income would suggest would be affordable,” Heap said. “Thus, reduced homebuyer demand due to higher rates and the perception of overvaluation as more new construction becomes available could lead to price discounts and a corresponding decline in prices. In addition, these markets have seen significant migration from other states, mostly from the Northeast, as well as the retirement of baby boomers. These buyers may now look elsewhere where they perceive prices to be more affordable, which will dampen demand and may lead to some price reductions by builders.” Mortgage rates may be historically low, but homebuyer morale is also low these

days, says George Ratiu, manager of economic research for

He said the main issue at the moment is that property markets are moving through a reset, moving away from the chaotic pace of 2020-2021, after a sharp increase in mortgage rates in the first half of 2022, which made it difficult to record a sharp rise in house prices.

“The increase in borrowing costs has created an affordability ceiling for many buyers who are finding that their incomes are no longer sufficient to cover much higher potential mortgage payments,” Ratiu said. “As a result, with demand cooling significantly, the number of homes listed for sale are staying on the market longer, and motivated homeowners are turning to lower prices to close deals.”

In June, inventory data showed that about 15% of listed homes showed price declines, double the number seen last year. These trends are particularly noticeable in megacities, which have seen an influx of residents and capital over the past couple of years, especially in the Sun Belt. Markets such as Austin, Texas; Raleigh, North Carolina; Phoenix; the Lakeland-Winter Haven metro area in Florida; and Stockton, Calif., are showing some of the highest increases in the number of homes listed for sale at reduced prices.

Ratiu said: “In many of these markets, prices have risen sharply during the pandemic, but with inflation eating away at most people’s incomes, the ability to continue paying more has disappeared. With wages lagging prices and rates much higher than a year ago, we can expect sales and price adjustments to continue in these markets through late 2022 and into the year ahead.”

Susan Wachter, the Albert Sussman Professor of Real Estate and a professor of finance at the University of Pennsylvania’s Wharton School, said Moody’s forecast of lower prices points to overpriced housing markets based on income.

“That’s what makes these markets different,” she explained. “In some markets, supply is limited. Some, like parts of Florida, are less. It is reasonable to expect that overpriced markets based on historical ratios will be at risk of slowing growth. This does not address what happens after income growth slows or declines, i.e. in a recovery. What is missing from this calculation is the identification of amenity-rich, supply-constrained markets where price growth is likely to pick up post-recession. With long-term revenue gains, this market is destined to become hot again.”

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