Home Prices Overvalued in 88% of the U.S.

Homes overvalued/? At the end of 2019, the median national price for a sold home was $327,100. In the third quarter of 2023, it was $431,000, or a jump of 31.8%.

Yes, overvalued sounds apt.

According to Fitch Ratings, on a population-weighted average basis, 88% of homes in U.S. metropolitan statistical areas (MSAs) were overvalued in the second quarter of 2023.

The amount of overvaluation was 9.4%. In 55% of the MSAs, overvaluation was at least 10%. That should mean much of the remaining 45% of the MSAs saw significantly lower levels of overvaluation.

The three MSAs with the highest overvaluation were Charleston-North Charleston, SC; El Paso, TX; and Camden, NJ.

The firm expects overvaluation to remain elevated due to the continued rise in home prices in Q3.

“Fitch attributes the decline in existing home sales to affordability challenges for home buyers due to a persistently high mortgage rate environment and the sustained pressure of elevated home prices,” the company writes. “Additionally, a stagnant supply contributes to both rising prices and lower sales volume, further impacting home sales.”

The stagnant supply is probably due in large part to the lack of existing home sales. People who own a home at low interest rate may not be able to afford a purchase of a property that has also shot up in price and a mortgage rate that even as it has been falling — about 6.6% this week — is still likely to give people with far lower rates sticker shock. They stay in their homes and there is less inventory, and so higher prices. Another force depressing housing stock is the cost of construction and financing.

Fitch expects prices to right between 0% and 3% in 2024 and 2% to 4% in 2025. It predicts that the Federal Reserve to take the funds rate to 4.75% by the end of 2024, 75 basis points below year-end 2023 levels. “This will continue to impact affordability, particularly for entry-level and first-time homebuyers, thereby constraining demand. Housing inventory is still constrained, with 3.6 months of supply as of October 2023.”

While attention is largely focused on consumers, higher prices also have an impact on institutional buyers looking to enter or expand on their presence in single-family rental. They slowed acquisitions in the first two quarters of 2023. Only $412 million of transactions were completed in the first half of the year, compared to $2.7 billion last year.