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Homes In Almost Every U.S. City Are Overvalued!
According to Moody’s Analytics, real estate is overvalued in 97% of U.S. cities.
Although some would argue that our country has found a new normal in the wake of the COVID-19 crisis, the pandemic still continues to rock the economy in weird ways. In the real estate world, the pandemic boosted home prices in parts of the country that aren’t even close to the typical hot spots. And now, Moody’s Analytics estimates that homes are overvalued in 97% of U.S. cities.
There were two main catalysts that triggered this real estate boom during the pandemic. First, shortages in lumber and building materials, and the subsequent delays in construction, contributed to a nationwide housing shortage. We are still in an economy where there are more home buyers than there are houses available for sale. Second, the introduction of remote work allowed workers to leave corporate hot spots and cities for more rural, and traditionally less desirable locations. Since fewer professionals need to worry about commuting to the office every day, they don’t need to live as close to their buildings.
As such, we’ve seen people leaving traditionally expensive cities to purchase homes and land in more “off the grid” areas. For example, Boise, Idaho became the most overpriced city in the nation. Boise became a hot spot for technology professionals who got permission to work remotely and wanted to escape the expenses that come with living in California. Before long, homes in Boise became overvalued by 73%.
The most overvalued regions tend to be smaller cities and towns (like Boise) and not traditionally expensive cities, such as New York or San Francisco. In particular, cities in the South and Mountain West saw a huge influx of homebuyers during the pandemic, which resulted in real estate becoming much pricier than historical norms for the areas. The amount a given housing market is considered overvalued depends on how much property costs in the area have risen above the historical relationship between home prices and incomes, rents, and construction costs. In places like New York and San Francisco, housing costs are notoriously high, but people also make higher incomes to keep up with the cost. But now, people who lived in these pricier cities can move anywhere, creating fierce competition for locals with smaller budgets who have less income to spare for the purchase of a new home.
Now, the fear for many is that what goes up must eventually come down. While experts aren’t necessarily worried about a housing bubble popping and leading to another Great Recession at this time, home values will eventually have to come down. There is a general consensus that home values in the most overpriced regions could drop by 10% over the next few years.
As a new homeowner, it could be a significant risk to buy a house now because you always hope to make a return on your investment when you eventually decide to sell. But if home values do drop significantly, you may be more likely to take a loss when it’s time to move again. Additionally, higher home prices also lead to higher mortgages. Rising mortgage rates could add thousands of dollars to the annual price of your home.
Essentially, the key takeaway is that now it’s the best time to buy a new home. Despite the competition and sometimes sheer desperation to buy new homes right now, high prices and rising mortgage rates are not in your favor. If at all possible, it’s probably best to wait a year or two for the housing markets to normalize before beginning your own house hunt. And of course, always consult with a knowledgable real estate agent who can give you specific advice about your local housing market.
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