In some markets, the numbers are cartoonish. The city of Punta Gorda, Florida—a gulf coast suburb with a population of around 20,000 about an hour’s drive north of Fort Myers—saw home prices rise almost 30% between spring of 2021 and 2022, a third more than the national average. Three states saw average price appreciation top 25% earlier this year (Florida, Arizona and Utah) and three metros in California (San Diego, San Jose and San Francisco) saw home price growth outstrip median wages by more than six figures in raw dollar amounts.
While experts and economists are still convinced that the current market is nothing like that which preceded the Great Recession, a pullback—small or significant—has long seemed inevitable. When that happens, there will almost certainly be some markets hit harder than others based on the degree prices have been inflated over economic fundamentals.
Ken Johnson, a researcher and economist at Florida Atlantic University (FAU), helps lead a project that compares current home prices with a baseline appreciation relying on long-term historical trends, using a methodology intended to offer “practical usefulness” to consumers and real estate professionals.
By this measure, 99 out of 100 markets surveyed were overvalued as of last month, with 13 metros seeing current home prices 50% above where they should be, and one city (Boise, Idaho) at 75% overvalued.
While eventually, all regions should see their prices fall back to this level, whether that happens abruptly or not depends on fundamentals, and the specific conditions of that market.
Eli Beracha, another researcher on the project and a professor at Florida Atlantic University, said in a statement that even at these ridiculous levels, a pull-back won’t mean homes losing a majority of their values, as was the case in 2008.
“At the peak of the last housing cycle, we had an oversupply of housing units around the country,” Beracha said. “So when prices began to fall, there was nothing to catch them, and we witnessed a monumental crash. The current shortage of homes for sale will help put a floor under just how far prices can fall this time around.”
Johnson said one way to predict which markets will struggle to absorb a downturn is looking at where there is minimal or no population growth alongside the housing price increase, singling out Memphis, Tennessee and Detroit, Michigan as examples of this dynamic.
According to Zillow, Memphis home prices were up 22.7% in April. At the same time, the city actually suffered a net loss of households, according to a University of Tennessee analysis.
Austin, Texas, with a staggering price appreciation of 40.8% by Zillow’s estimate, also grew in population by 2.3% between 2020 and 2021, according to census data. That might make the city—and others like it—more able to weather a downturn, with a thriving labor market and tighter inventory to bolster the real estate economy.
Johnson said the tradeoff is unfortunately that housing will remain inaccessible longer in these areas, while regions that snap back to more reasonable prices will become more affordable in the near future.
“Essentially, you have to pick your poison,” Johnson said. “Is it better for you to live in an area with major price declines so housing is more affordable again, or in an area with modest or very small price declines that keep homes out of reach for many middle-class Americans?”
Two other analyses have tried to break down this concept of “overvalued” amid historically uninhibited price growth. California-based ATTOM Data Solutions published a list of “vulnerable” markets at the beginning of the year, and CoreLogic more recently identified downturn risk in about 400 home markets across the country, rating them from “very low” to “elevated.” That analysis also singled out markets as overvalued, with 65% of its selected meeting that criteria.
Just because a market was overvalued did not automatically leave it at risk for a downturn, according to the researchers.
According to CoreLogic, while Austin is overvalued, the risk from a downturn is very low. Conversely, Detroit was rated as “undervalued” based on the increase in local wages, but still at a medium risk for a downtown overall—again based on fundamentals.
Another market that is not significantly overvalued according to FAU (7.69% price above long-term estimate), but is at risk of a downturn is Stamford, Connecticut in the New York suburbs. CoreLogic rated this city as a high risk for a downturn in the company’s analysis, and in its most recent Home Price Index, report warned that the area has more than a 70% probability of price decline in the next 12 months.
Paul Ferreira, a team leader for RE/MAX with almost 2,000 homes sold in the area, told RISMedia earlier this year that he has been advising clients for several months to hold off on buying out of fear of a downturn.
“If they can’t find the property, a lot of these people are starting to sit out the market,” he says, “And I think that’s starting to affect the market—people’s ability to persevere over all these crazy offers.”
Sellers are looking at what their neighbors’ home sold for a few months ago and listing at unreasonably high prices, Ferreira explains—but are no longer getting offers at that level, at least not at certain price points.
“I’m starting to see a chink in the armor,” he warns.
Using local income levels as a barometer can be useful—as both the ATTOM and CoreLogic analyses did—but that metric is also growing more disconnected from the local housing market, according to Jordan Levine, vice president and chief economist for the California Association of REALTORS®.
Speaking to RISMedia specifically about the ATTOM report, Levine warned that some of the issues showing up in these numbers would be less acute if remote workers and their incomes were accounted for, and that there aren’t as many “fundamental issues” as were seen in 2008.
“That tends to exacerbate the kind of risk factors that show up in those numbers,” he added.