As US housing market returns to sanity, researchers say these 5 cities are poised for deep price declines

As US housing market returns to sanity, researchers say these 5 cities are poised for deep price declines

If you’ve been squeezed out of the tight housing market for the past couple of years waiting for a chance to buy, you might finally get your chance – and some places are already looking more attractive to buyers.

The housing market is starting to cool, and cities that have seen an “inflow of affluence,” as Rick Palacios, Jr. calls it, may see prices fall more.

Palacios is director of research at John Burns Real Estate Consulting, which provides housing market analysis to clients such as builders, brokers and investors.

He predicts a major downturn in the housing market in Boise, Austin, Nashville, Phoenix, Sacramento and other cities where prices rose during the COVID-19 pandemic as more people moved into them.

“These are some of the markets where we expected the steepest price declines in 2023,” says Palacios.

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Once tight markets will drive down

They’re the cities that people flocked to during the pandemic, earning them the nickname “Zoom Cities.” They have a high quality of life and traditionally lower house prices than the big centres.

And since the beginning of the pandemic, people who could work remotely have moved into these areas, occupying the relatively cheap houses and driving up prices.

But Palacios predicts a sharp decline in home prices in those cities, with Boise leading the way.

Boise became one of the least affordable cities to buy during the pandemic as an influx of people bought real estate in the area. House prices reached 72% above what a middle-income family can afford last year, according to Oxford Economics.

“Boise is one of those markets that always rides the bubble wave. When things are great, I mean, it’s just—he catches that wave,” says Palacios.

But the same can be said for when things start going downhill.

“Just looking at the rate of increase in home appreciation, [Boise] has been completely reversed. And it is, I think, the single market that we expect to see prices fall in 2022.”

And while that may be tough news for people who have bought in Boise and similar cities over the past couple of years, it’s good news for anyone looking to buy real estate — although it could take several months or even years for prices to drop. .

Investors are pumping the breaks

Home values ​​in Phoenix rose 25% last year, according to the Zillow Value Index.

“As of the first quarter of this year … investor transactions account for 45% of the total housing market,” says Palacios.

This includes people buying second homes, investment properties and flip homes.

“This is a big deal,” says Palacios. “And there are many markets across the country where investor transactions are now 30-40-45% of all home purchases.”

Investment-driven markets have a good upside, Palacios says, but they can turn around quickly.

“That’s why we have some pretty negative forecasts, especially on a relative basis for slower, steady markets.”

According to Redfin, investor purchases in Nashville fell nearly 17% in the first quarter of 2022, 17% in Las Vegas and 21% in Sacramento.

Stock on the rise

From February 2020, before the housing market tanked, to this summer, home prices in Boise increased 58 percent, Palacios says. In Austin, they increased by 75% and in Nashville, they increased by 56%.

“We see affordability as one of the most, if not the most important indicator of how sustainable things are in a market,” says Palacios.

And as interest rates began to rise — the national rate for a 30-year mortgage is now 5.66%, according to Freddie Mac — it became clear how unsustainable those rates had become.

“The monthly payment is up 40-50% year over year,” says Palacios. “And that’s a huge shock to that buyer, which tells you why these markets have gone down so quickly.”

Companies are also starting to put people back in the office, which has played a role in more people putting their homes up for sale and increasing inventory.

Home inventory is up 26% nationwide year over year, according to Realtor.com.

Ratiu says inventory is growing in Austin, Raleigh, Nashville, Sacramento and other cities – again, cities that have seen population growth in the past two years.

“These markets have, in many ways, attracted people from coastal, much more expensive markets,” says Ratiu.

“Austin was a magnet for a lot of tech workers from San Francisco, Silicon Valley, Seattle, Los Angeles, most of whom were really attracted by the relative affordability. It’s no surprise that, in turn, these markets are somehow driving the shift in the market.”

According to Redfin, Austin saw the largest increase in inventory. The number of homes for sale in the city rose by 27% in June, compared to last year.

But as more homes come on the market, sellers are still hoping for those top market prices, Ratiu says.

“The markets have changed dramatically in the last three months. And what we’re seeing in terms of pricing, we’re still seeing a lot of homeowners listing homes based on what they bought six months ago.”

And price cuts for listings are increasing. In July, 19% of listings reduced their prices nationally, approaching levels not seen since 2017.

Nearly 70% of sellers in Boise had to drop their prices in July, according to Redfin.

What should buyers do now?

Palacios says all signs point to a housing slowdown, and while it may take several months or more for prices to come down, if you can wait, you should.

“We haven’t been in a slowing environment for several years,” says Palacios.

“The options will be out there. And I don’t think it’s the worst decision in the world to be a little more patient now than you would have been when rates were 3-4%.

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This article provides information only and should not be construed as advice. Provided without warranty of any kind.

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