Home Prices Likely To Fall More Than Expected in These Overvalued Markets

As demand recently started plummeting after two years of the housing market booming beyond what many would consider affordable, experts and analysts predicted a home price correction would soon begin.

Newsweek first talked about how this home price correction could impact the market back in July, when analysts predicted home prices could drop by as much as 3 percent in 2023.

Three months later, experts are looking into a more drastic drop than previously forecasted.

"Demand has plummeted and single-family existing home sales are down about 25 percent since the start of the year," Thomas LaSalvia, senior economist at Moody's Analytics, told Newsweek.

"And with interest rates and then mortgage rates likely continuing to go up with the stubbornness of prices right now, the continued lack of inventory is going to continue to keep a lot of households on the sidelines, and this, in sum, should lead to that 5 to 10 percent decline in single-family home prices."

This is in line with Moody's earlier predictions. But "the downside scenario is a bit worse," LaSalvia said.

"This hasn't dramatically changed our baseline, but it is making us more wary of a worse downside—meaning price declines—certainly in some markets, close to 20 percent or more."

This 20 percent drop is expected to take place in the most overvalued markets, including Boise, Idaho, Phoenix, Arizona or Austin, Texas, "where single-family home prices increased much, much more than income," LaSalvia said. "The big change is the increased probability of a deeper decline and longer-lasting decline in the single-family market. This is likely to be pretty slow, 6 to 18 months for [the] single-family [market]."

LaSalvia said that the drop in home prices will depend "on exactly where mortgage rates go and the length and depth of the slowdown."

If interest and mortgage rates stay high due to inflation, the Moody's economist said this would increase the burden for potential buyers and it would be troublesome for homeowners to sell "unless they have a prime property in a prime location."

Despite the deeper drop forecasted, these overvalued markets are not going to experience what economists would call a crash, LaSalvia said.

"The word crash is a bit too strong because for a crash there needs to be a good amount of distressed sales, a good amount of households that have a long spell of unemployment or large declines in income, and that forces them to sell quickly or hand the keys over to the bank," he said.

"Right now, that stubborn labor market is preventing us from heading towards the 2008 situation," LaSalvia said.

For the housing market to crash now, even in the most overvalued areas, the labor market should "really take a dip," said LaSalvia.

"While there is a slightly growing probability of that, it's still not a large probability that we're going to see, say, unemployment rates hit 7 or 8 percent. That is very outside of our expectations right now," he added.