Nearly half of the nation’s top 50 metro markets are overvalued, which is fueling the continued lack of affordable homeownership opportunities, according to the latest Real House Price Index (RHPI) data from First American Data & Analytics, a division of First American Financial Corporation (NYSE: FAF).
“Of the top 50 markets tracked, 22 markets were overvalued in March, meaning the median existing-home sale price exceeded house-buying power,” said First American Chief Economist Mark Fleming. “The number of overvalued markets has increased since our last analysis of overvalued markets in July 2022, when just 15 market were considered overvalued. The market with the highest overvaluation was San Jose, California, where the median consumer house-buying power in March was $723,000, significantly below the median sale price of a home at $1,430,000.”
Fleming added, “In markets considered overvalued, the chronic housing supply shortage is preventing prices from adjusting downward enough to reflect the affordability reality. Additionally, house prices are ‘downside sticky.’ Home sellers would rather withdraw from the market than sell at lower prices.”
However, Fleming stressed that most of the markets tracked by First American “remain undervalued by this measure, and nine markets were undervalued by $100,000 or more. Detroit, Philadelphia, and Cleveland are markets considered undervalued by an average of $145,000.”
Fleming observed that rising home prices and elevated mortgage rates “drove the year-over-year decline in affordability,” a situation that is exacerbated by relatively anemic upticks in household income.
“Reducing overvaluation can occur through lower house prices, lower mortgage rates, fast-rising incomes, or some combination of the three,” he said. “As ‘higher-for-longer’ mortgage rates are increasingly likely, sellers have less incentive to sell, keeping inventory short and, all else equal, pushing prices higher. But that’s only half the story in a ‘higher-for-longer’ world – house-buying power is also reduced, which can soften demand, so it’s not a certainty that prices continue to march upward. Whether affordability drifts over or under in the coming months will depend on whether the supply-tightening response to higher rates is stronger or weaker than the demand-softening response.”
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