U.S. homes overvalued in 4Q, but virus could reverse that: Fitch

The fallout from the coronavirus could turn a situation in the U.S. where homes were overvalued prior to the crisis to a scenario of price drops, a Fitch Ratings report said.

At the end of the fourth quarter, before COVID-19 affected all economic activity in the U.S., home prices nationwide were overvalued by 1.5%, up from 1.2% in the third quarter but down from 2.1% on a year-over-year basis, according to Fitch’s estimates.

But things could turn around quickly because of the illness.

"The broad spread of coronavirus in the U.S. will slow down home buying activity, leading to a temporary drop in demand and lower home price growth," said the report authored by Jian Mao and Suzanne Mistretta. "The magnitude of the impact of COVID-19 on home prices will evolve over time. A widespread and protracted period of containment could result in larger disruptions to local economies, higher unemployment and home price declines."

The good news, the Fitch analysts said, was that low mortgage rates and an increase in housing starts prior to the crisis might limit the depth of those price drops.

"The average 30-year fixed rate mortgage of around 3.3%, nearly the 50-year low, is trending down with the central banks' emergency cut. This will increase borrowers' affordability and encourage the refinancing activity.

"Meanwhile, housing starts spiked in December 2019, reaching the highest level since 2007. Along with increasing rents and limited housing supply, these indicators will provide a floor to the possible home prices declines caused by COVID-19," Mao and Mistretta wrote.

However some markets are particularly vulnerable. Homes in approximately 18% of the nation's metropolitan areas are at more than 10% overvalued, Fitch estimated.

Among the 20 largest metro areas, the most overvalued are Las Vegas, Dallas and Phoenix.

Fitch also mentioned the Texas cities of San Antonio and Austin as being particularly overvalued.