Home prices are overvalued in 70% of metropolitan areas: Fitch

After the past year of record-shattering home price appreciation, the majority of the country is overvalued, according to Fitch Ratings Sustainable Home Price Report.

The credit rating agency estimated prices at the national level are overvaluing homes by 10.5% in the third quarter, which included 70% of metropolitan areas. Further, the report showed 40% of markets overshot their value by 10% or more, compared to a 4% pre-pandemic share.

Every one of the 20 most populated housing markets experienced unsustainable annual growth at the end of the second quarter, compared to only two in the previous two years. Among the top 100 metro areas, Boise, Idaho, led the country with a 35.4% overvaluation. Austin, Texas and Deltona, Fla., followed at 24% and 20.4%, respectively. On the other end of the spectrum, Jackson, Miss., had the least amount of overvaluation, at 2.4%. It finished just ahead of 2.7% in McAllen, Texas, and 2.9% in Baton Rouge, La.

Fitch also found that only eight states— Alaska, Iowa, Illinois, Louisiana, Mississippi, North Dakota, West Virginia and Wyoming — experienced sustainable annual appreciation by the end of the second quarter. They all saw year-over-year price growth below 14%. Meanwhile, the highest rates of appreciation took place in Idaho at 37.06%, Utah at 28.22%, and Arizona at 23.88%.

While the extreme imbalance of supply and demand stoked the elevated appreciation, the underlying market fundamentals point to the rate of growth slowing down moving forward, the report said. Home sales recently declined in part because more consumers became pessimistic about purchasing conditions. With mortgage rates rising and expected to increase further into 2022, it thins out the pool of potential borrowers due to the higher costs.

Additionally, inventory could be on the rise as more homeowners begin to list their properties and lumber costs deflate from hitting an all-time peak in May. Cheaper materials lead to more construction and October saw the largest jump in builder applications since January, according to the Mortgage Bankers Association.