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September 16, 2022

U.S. housing markets could see 15-20% price declines as ‘weakness’ looms ahead

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A home in the country surrounded by trees Agustin Jo/

The much-discussed “correction” of the U.S. housing market is becoming more evident with each passing month. The question is no longer when it will come, but how steep the declines will be in residential markets across the country.

The latest quarterly assessment home prices conducted by Moody’s Analytics found that 210 U.S. housing markets could face average home price declines of 15% to 20% over the next 12-18 months if there is a recession. This is especially likely in markets that Moody’s deems “significantly overvalued” by 25% or greater.

That means more than half of the largest regional housing markets in the country could be facing a tumble that isn’t a far cry from the period of the 2008 recession, Fortune reported. From 2006-2012, U.S. home prices declined nationally by 27%.

Moody’s doesn’t project as dire of an outcome for the nation as a whole, forecasting a 5% to 10% national home price decline even if there is a recession.

Whether or not a major economic downturn comes to pass is an especially important indicator for the housing markets most vulnerable to collapse. If there is no recession, the “significantly overvalued” markets would face much more mild home price declines of 5% to 10%, rather than 15% to 20%, Moody’s predicts.

Among the most overvalued markets in the country are Boise, Charlotte, Austin, Las Vegas and Phoenix. Moody’s housing valuation index is determined using the percent difference between actual house prices and house prices historically consistent with wages and salaries per capita and construction costs in each market.

Many aspiring home buyers have been held back by rising prices and higher mortgage rates, now near 5.9%. Falling home prices have become a necessity for a large group of buyers to even consider seeking a home at this point. A plummeting housing market will always be alarming, but it’s important to keep the perspective of the unusual pandemic surge in mind.

“The longer that [mortgage] rates stay elevated, our view is that housing is going to continue to feel it and have this reset mode, rick Palacios Jr., head of research at John Burns Real Estate Consulting, told Fortune. “And the affordability resetting mechanism right now that has to happen is on [home] prices. And so there are a lot of markets across the country where we’re forecasting that home prices are going to fall double digits.”

The Moody’s data comes as Goldman Sachs Chief Economist Jan Hatzius predicted that the housing slide will continue for the foreseeable future.

“Housing I think still has a significant amount of weakness ahead,” Hatzius told Yahoo Finance. “The indicators there have continued to come in on the weaker side. So while the consumer might be doing a little bit better because of lower inflation, I think housing is going to be pretty soft.”