While housing recessions are historically common, house price corrections are less common. That’s why the housing bulls—as they did in 2006—refused to acknowledge the possibility of falling home prices. But once again they are wrong. As the data came out this summer, John Burns Real Estate Consulting provided Fortune with data showing that bubble markets like Boise and Phoenix had already soared to their home price peaks. Now, it appears that the house price correction has overtaken overheated Western housing markets. Among the 148 major regional housing markets tracked by John Burns Real Estate Consulting, 98 markets have seen home values fall from their 2022 highs. In 11 markets, the Burns Home Value Index* has already fallen more than 5% . Simply put: The US home price correction is sharper—and more widespread—than previously thought. “Our view is that you’re going to see — and we’re seeing it now — home prices are going to come down even though supply levels are not higher. And I think that’s an interesting thing that’s now starting to surprise a lot of people.” Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune. When the last housing cycle hit in 2005, home prices didn’t fall until inventory levels skyrocketed. This time, home prices are falling despite inventory levels still 41.5% below pre-pandemic levels. How is this done? Well, rising mortgage rates coupled with record appreciation in home prices have pushed the housing market to frothy levels. And now buyers are pushing back. “The more that [mortgage] Rates remain high, our view is that housing will continue to feel it and have that reset function. And the affordability reset mechanism right now that needs to happen is on [home] prices. And so, there are a lot of markets across the country where we’re predicting home prices will drop by double digits,” says Palacios. The story continues Check out this interactive chart on Fortune.com The housing markets hit hardest by the pandemic housing slump fall into one of two groups. The first is the high-cost technology hubs. In fact, the biggest declines in home values can be found in San Francisco (down 8.2% from its peak in 2022), San Jose (down 8.2%) and Seattle (down 7.8%) . Not only are high-end real estate markets more rate-sensitive, but so are their technology sectors. The second group includes bubble markets like Austin (down 3.5%), Boise (down 3.5%), Phoenix (down 5.3%) and Reno (down 5.3%). The Pandemic Housing Boom has seen home prices in markets like Austin and Phoenix far exceed what local incomes would historically support. According to Moody’s Analytics, Boise alone is “overvalued” by 72%. Historically speaking, as a housing cycle “rolls” it normally hits very “overvalued” housing markets the most. Check out this interactive chart on Fortune.com While 98 markets have retreated from their peaks, another 50 markets have yet to retreat from their peak price in 2022. Most of these markets are located along the East Coast. Some of those markets, like Newark and Louisville, saw more modest gains during the pandemic housing boom. Eleven of those markets are in Florida, which has remained surprisingly resilient this summer But just because a market hasn’t seen home prices fall doesn’t mean it won’t. Indeed, this could still be the first period of the home price correction: As of May, John Burns Real Estate Consulting predicted that U.S. home prices would decline in both 2023 and 2024. From top to bottom, Moody’s Analytics expects US home prices to decline by as much as 5% this cycle. In significantly “overvalued” housing markets, Moody’s Analytics expects a decline of 5% to 10%. This call does not assume a recession. If a recession occurs, Moody’s Analytics expects home prices to fall 5% to 10% nationwide. In significantly “overvalued” housing markets, a recession means home prices will likely fall between 15% and 20%. Several other research firms, including Zonda and Zelman & Associates, have emerged predicting a decline in US home prices. However, no one is predicting US home prices to fall to the same level as the last housing downturn. US home prices fell 27% between 2006 and 2012. “I know [double-digit home price declines] it sounds really bad, but the reality is you have to take a longer-term view on it and have some perspective because these markets have performed 30%, 40%, 50% plus over the last couple of years. So we really compressed the decade of house price appreciation into a year or two. So even if our forecasts are correct and prices decline by double digits in some of these markets over the next few years, we will only get back to home prices in 2020 or early 2021,” Palacios tells Fortune. If you want to listen to Rick Palacios Jr’s full interview, go here and skip to the 9:00 minute mark. If you want to stay updated on the housing fix, follow @NewsLambert on Twitter. *The ongoing housing correction has seen high-end home sales decline at a faster rate than other price points. This, of course, skews both the average and median home sale prices. The Burns Home Value Index—a proprietary calculation of local home values—helps cut through that noise for both new and existing homes. August 2022 results are preliminary. This story was originally featured on Fortune.com
