Homes in 97% of U.S. cities are overvalued, Moody’s says

Homes in 97% of U.S. cities are overvalued, Moody’s says

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Home values in 97% of U.S. cities are overvalued, and real estate in some of the most overpriced regions could fall by 10% over the next few years, according to Moody’s Analytics.

The pandemic has boosted home prices in parts of the country far beyond the typical coastal hot spots, Moody’s chief economist Mark Zandi said in a new analysis. The most overpriced city in the nation is Boise, Idaho, which became a magnet for technology workers who wanted to relocate from pricey California cities when their offices shut due to the pandemic. By Moody’s reckoning, Boise’s homes are 73% overvalued, making it the most overpriced city in the nation.

Florida is the least affordable place to live in the U.S.How much do rising mortgage rates add to the cost of a homeThe analysis may raise concerns for homebuyers, especially in regions where real estate prices have enjoyed rapid gains during the pandemic. At the same time, buyers face a double-whammy of high housing prices and rapidly rising mortgage rates, with the latter adding thousands of dollars to the annual cost of a home. 

Cities in the South and Mountain West, which have seen an influx of buyers during the pandemic, could suffer a 10% drop in housing prices during the next several years, Zandi predicted.

“It probably makes sense to wait a year or two if you are able,” he said in an email to CBS MoneyWatch. “House prices will be lower in the most overpriced markets, and there will be more housing inventory to choose from.”

Zandi added, “Of course, it won’t be a slam-dunk better market to purchase a home if you need a mortgage, as mortgage rates will likely be higher.”

The economist said a given housing market is considered overvalued if property costs in the area are “well above” the historical relationship between home prices and incomes, rents and construction costs. 

That may explain why smaller cities like Boise are at the top of the list of overvalued home markets, rather than notoriously expensive cities like New York. Housing may be pricier on a per-foot basis in New York or San Francisco, but workers there typically have higher incomes and can support higher costs. 

Locals in Boise are now competing with buyers from San Francisco and other big cities, who often have more money to spend on  housing. That is driving up prices beyond the reach of many people earning a typical salary in those regions. 

Nashville, where Moody’s estimates homes are 48% overvalued, is one of those cities experiencing the pain of rapid price escalation. Realtor Shane Tallant told CBS News that new property listings under $700,000 generate frenzies, with often more than a dozen offers within 24 hours. 

Soaring real estate prices in Nashiville are forcing out some businesses and consumers. The Little Pantry That Could, which provides food assistance to people in need, was forced to close because its five-year lease wasn’t renewed in a neighborhood where investors are buying properties. 

“I don’t feel like it’s my fault, but yeah, of course, it’s clear we’re letting them down,” Stacy Downey, the executive director of the pantry, told CBS News. 

“Rock and a hard place“The nation’s most overvalued cities aren’t the usual suspects. After Boise, the second-most overpriced market is Sherman-Denison, Texas, near the Dallas-Fort Worth area, where homes are valued 60% above what fundamentals would suggest. Its population has grown by double-digits for two decades as people relocated to Texas from other regions. The third most overpriced city is Muskegon, Michigan, where housing is 59% overvalued, Moody’s found. 

Homebuyers are “stuck between a rock and a hard place,” especially first-time purchasers, noted Jeff Tucker, senior economist at Zillow. 

On the one side are surging home prices and mortgage rates, but on the flip side are skyrocketing rents, he pointed out. The monthly rent in the nation’s 50 largest cities rose an average of 14% in 2021, adding to the financial pressure facing many Americans. That’s fueling an interest in buying because purchasers can at least lock in a stable monthly mortgage payment, even if they’ll be paying more than a year ago, Tucker noted.

Florida is the least affordable state to live in


The nation’s high housing valuations are raising questions about whether the housing market is facing another bubble, like the one in 2006 that fueled the Great Recession. Yet such concerns are likely misplaced, Tucker said.

“There are a lot of stark differences with the mid-2000s,” he said. “For one thing, rents are rising very rapidly, and the credit of all the recent homebuyers is really strong.”

That might protect against a repeat of the housing bust, but it may not assuage homebuyers’ fears of overpaying. House-hunters should examine their budgets to figure out if they can afford the purchase, with the guiding principle being to spend no more than one-third of gross income on housing costs, including mortgage, property tax, insurance and maintenance, experts say.

Tucker also recommends asking whether a prospective buyer would be happy to live in the home for several years. 

“The classic rule of thumb is five years” to hold onto a property, he said. “If the answers to those questions are yes, then I think there is a good argument for forging ahead to buy that house.”

He added, “The other important question is ‘Where else would I be living, and how much would that cost?'”

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