Local housing market overvalued; odds of price decline very low


TRI-CITIES, Tenn. – The local cohort waiting for home prices to crash keeps on waiting and waiting. Given current conditions and the best data-driven crystal ball gazing available, they may keep on waiting.

Much of their determination is fueled by media reports like the Goldman Sachs paper titled “The Housing Downturn: Further To Fall.” It hit the streets during the last week of August with a forecast that U.S. housing market will end 2022 down across the board. It predicted new home sales would drop 22%, and existing homes would be down 17%. It also included a gloomy 2023 forecast that new home sales would be down another 8% and existing home sales would drop another 14%.

Goldman Sachs researchers also said, “While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.” In other words, don’t underestimate the hyper-local effects in individual housing markets like the Tri-Cities.

Other experts think we’ll see a single-digit rise in home prices over the coming year. That group includes the Mortgage Bankers Assn., Fannie Mae, Freddie Mac, CoreLogic, and Zillow.

Those who see declining prices on the horizon include Moody’s Analytics, John Burnes Real Estate Consulting, Capital Economics, Zelman and Associates, and Zonda. Fitch Ratings and economist Robert Shiller think a greater than 10% price decline is on the table.

At the same time, local data show the Tri-Cities market is cruising toward its third annual double-digit price appreciation. Sales are slowing, and inventory is increasing, but at a snail’s pace.

The dueling forecasts are driven by the quest to curb inflation. Housing is no longer just collateral damage in that effort; it’s in the cross hairs. Fed Chair Jerome Powell has been quoted saying, “I’d say if you are a homebuyer, or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is low again.”

CoreLogic has made one of the better efforts to get a handle on the big picture. To gauge the likelihood of regional price declines, its analysts assessed income growth projections, unemployment forecasts, consumer confidence, debt-to-income ratios, affordability, mortgage rates, and inventory levels of metro areas across the U.S. From that data soup, it labeled regional housing markets into categories grouped by the likelihood that prices would fall.

The categories are:

  • Very high – Over 70% chance of a price decline.
  • High – 50% – 70% chance
  • Medium – 40% to 50% change
  • Low – 20% – 40% chance
  • Very Low – 0% – 20% chance

The latest update of that analysis said both Tri-Cities housing markets’ odds of a price decline were “very low.”  And most U.S. metro areas are not in the very high class.  In fact, only 125 and the 392 metro areas in the most current analysis update have a greater than 50% chance of seeing prices decline during the coming 12 months. Combined, those with the very high, and high, metros with the highest odds of price declines are clustered along the West Coast and the upper Northeast.

An analysis by Moody’s said housing markets were overvalued in both Tri-Cities metro areas. How much: 47.7% in the Kingsport-Bristol metro area and 38% in the Johnson City metro area. Here’s the Catch-22. The overvalued assessment is based on prices relative to their underlying economic fundamentals.

And no one will argue that most of the local market fundamentals are out of whack. The region has not seen balanced market conditions since the first quarter of 2018. The region is in the firm grips of a housing shortage while there’s a population churn of new residents. But even that requires some context.

Yes, the region is seeing impressive migration gains. But the death rate and outmigration are tamping down the net year-over-year population gain. Solid growth is coming in some communities, while others see stagnant growth or a population loss. Back of the envelope calculations say the region must have about 35 new residents daily to sustain its 2020 population.

National Association of Realtors (NAR) Chief Economist said in a CNBC Power Lunch interview that it’s “just inevitable that home price appreciation will slow down in the upcoming months.” He added that sellers must recognize that higher mortgage rates are sidelining some buyers even though homeowners are still seeing appreciation gains.

The paradox is if local markets are overvalued, why are the odds of big price reductions very low?

One reason is local home prices, and rents have historically been undervalued. The surge of new residents during the pandemic and substantial gains in the upper middle-income pay ranges nudged prices closer to market rates. What hasn’t increased at the same pace is wages. The region has some of the state’s lowest average private sector wages. They have lagged home prices for three years and rent increases for two years.

Still, the higher prices are likely sticky. The current year-to-date median price growth rate is almost 20%. And that middle-market rate is higher than the average price growth rate. That points to higher prices when the current frothy market does stabilize.

Last year’s annual price growth rate was 19.7%. The year before it was 11.1%. The two-decade annual average before those years was 2.7%. While the price growth rate will sooner or later stabilize nothing in the current market climate points to major price cuts.

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