Prediction: Local home prices could drop perhaps 5%-10% in a few U.S. areas with large home price increases that far surpassed their area’s household incomes.
NEW YORK – As home prices continue to rise – up 34.4% over the past two years, including a 19.8% spike over the past year – along with inflation and mortgage rates, more economists are voicing concerns about a possible price decline in some areas of the U.S.
The 19.8% gain is more than four times greater than the historic annual average posted since 1987, and well over the largest 12-month price jump posted in the years leading up to the 2008 financial crisis.
In March, researchers at the Federal Reserve Bank of Dallas warned that home prices were becoming detached from economic fundamentals like household incomes – but a housing correction is unlikely to spawn the kinds of macroeconomic issues that the last bubble generated. Unless buyer demand drops precipitously and a rash of sellers decide it’s time to list their home, the end result would be price stabilization rather than a bubble that pops.
However, a bubble could be forming for certain regional housing markets, with Fortune magazine saying some markets are priced exorbitantly compared to what local income levels can handle, according to analysis by Florida Atlantic University’s (FAU) Real Estate Initiative.
The FAU researchers found each of the 100 largest U.S. housing markets was overpriced relative to what economic fundamentals in the market would support as of March – including 44 markets that are overpriced by at least 30% and 13 markets overpriced by at least 50%.
Although Moody’s Analytics chief economist Mark Zandi does not expect a housing bust over the coming year, he cautioned that “overvalued” housing markets could see home prices slip 5% to 10% over the next 12 months while national home price growth hits zero.
In 2007, many of the country’s most overpriced housing markets were in California, New York, and Florida. California and New York rank much lower now, although Florida was cited for having some overpriced markets.