Most U.S. homes are currently overvalued, fueled by high mortgage rates and a persistent housing shortage. According to Fitch Ratings, at the end of 2023, homes were overvalued by 11.1% in about 90% of metro areas.
The issue is more pronounced in certain Southern states. Tennessee, Arkansas, and South Carolina experienced the highest increases in overvalued homes, with Montana and Alabama also seeing significant rises.
Several factors contribute to soaring home prices. Years of insufficient construction led to a housing shortage, worsened by climbing mortgage rates and costly building materials.
A report from Realtor.com indicates that the available home supply is 34.3% below pre-pandemic levels. This shortage has been further strained by sellers holding onto low-rate mortgages obtained during the pandemic, creating a "golden handcuff" scenario.
Fitch Ratings notes a slight increase in home listings in some areas, signaling potential market normalization. However, high mortgage rates and escalating home prices continue to slow this progress.
Economists foresee high mortgage rates through 2024, expecting declines only after the Federal Reserve reduces rates. However, they are skeptical of returning to the low rates seen during the pandemic, especially amid recent high inflation reports.
Freddie Mac reports that the average 30-year loan rate recently dropped to 7.02%, down from a peak of 7.79% last fall but still much higher than rates during the pandemic.
A Zillow survey found that homeowners are more likely to sell if their mortgage rate reaches 5% or higher. Currently, about 80% of mortgage holders enjoy rates below 5%.
A Redfin survey shows that the combination of high mortgage rates and rising home prices has pushed the median monthly housing payment to a record $2,775, up 11% from last year.
Ben Ayers, Nationwide's senior economist, stated, "Market conditions for homebuyers remain challenging with few homes listed and costs for ownership still climbing. Despite strong demand fundamentals, many first-time buyers are being shut out of the market by elevated financing rates and rising prices."
