Where are home prices expected to drop in the US over the next year?

The US has been experiencing a bout of high inflation as covid-19 disruptions to supply chains continue to create shortages while demand has been surging. The Russian invasion of Ukraine has only added to the financial pain households are feeling from rising prices.

The Federal Reserve has moved to put the brakes on runaway inflation by raising interest rates at the most aggressive clip since 1994. The knock-on effect though is higher borrowing costs on top of soaring housing prices for those looking to buy a home. However, some relief may be coming in certain markets.

Housing prices could decrease by ten percent in many US cities

Housing prices could come down by as much as ten percent in some markets that are overvalued reports Fortune according to Moody’s Analytics. Mark Zandi, the chief economist at Moody’s Analytics, told NPR that he expects prices to come down in some of the “most juiced-up markets.”

And, if “prices are 5, 10, 15% below where they are today where they’re peaking,” in two years’ time “I’d say that sounds about right to me,” he said. However, he doesn’t see a housing collapse because home prices will be bolstered by a couple fundamentals, supply and improved lending practices.

According to Freddie Mac, the government-sponsored agency charged with keeping mortgage markets liquid, the US market lacks around 4 million homes to meet the country’s needs. The shortage is a result of a decade of insufficient homebuilders available for new home construction, many of whom went under during the collapse of the housing bubble. With the level of demand not expected to wane drastically the limited supply will keep prices fairly high.

US markets stronger than in 2007

The housing bust in 2007 brought about new federal rules that put an end to exotic mortgages that had adjustable loan rates that spiked catching many borrowers off guard 15 years ago. As well, in addition to requirements for borrowers to document that they can afford the home that they are buying, “lenders have been very cautious,” according to Zandi.

That doesn’t mean that there isn’t exuberance in the US housing market. The Dallas Federal Reserve warned that there have been signs for more than five consecutive quarters through third quarter 2021 of “heighten expectations of strong house-price gains.” This has raised concerns that house prices are “becoming unhinged from fundamentals” once again.

Which cities might see house prices decline in the future?

Comparing expected prices based on historical trends to today’s actual prices Zandi has estimated just how much homes are overvalued in more than 400 cities and towns across the US. Just because prices in some markets are well-above where he would have expected, that doesn’t mean necessarily mean though that he thinks there will be a dramatic decrease in prices. Here’s a look at the ten at the top of the list.