Is America On The Precipice of a Housing Crash?

Home prices have skyrocketed since the pandemic, but industry data and some expert analyses suggests that the bubble may be about to burst, and the country may already be in the early stages of a dramatic housing crash.

In an X post earlier this month that has now garnered more than three million views, real estate analyst Nick Gerli warned that in parts of the country, the housing market was at the peak of a bubble that could collapse at any moment. “The number of new homes for sale in the Southern Region has spiked up to nearly 300,000,” he wrote. “This is the highest level of all time — even higher than the previous bubble peak in August 2006. These houses are overvalued by an average of 30%.”

“The builders in the South have gone absolutely crazy, and continue to pull single-family permits at an extremely high rate,” he continued. “Many are adopting a mid-2000s perspective of ‘build it and they will come.’ However, the demand has dropped off precipitously, with new home sales in the South falling down below pre-pandemic levels.”

Two key concerning metrics Gerli pointed to were a spike in active inventory, or houses that are currently on the market, and price cuts. Combined, these factors indicate a looming market downturn. The Florida and Texas markets look particularly vulnerable, according to Gerli’s data.

“I know this sounds very bearish on Southern real estate,” Gerli concluded. “But ultimately it’s pretty simple. Home builders and investors rampantly speculated in this housing market the last 3-4 years. And prices went far above what locals can afford. And created a bubble. Now that bubble is – slowly – popping. And it could start to pop pretty fast if a Recession is thrown into the mix.”

Notably, Gerli doesn’t see the same perilous path ahead for the rest of the country, as homebuilding in regions like the Northeast and Midwest remains relatively slow compared to the South.

But some markets in those regions are nonetheless similarly overvalued, and could be impacted by a domino effect if the housing market in the South collapses.

Earlier this year, researchers from Florida Atlantic University published a report showing that 98 of the top 100 housing markets in America are overvalued and likely headed for a serious “market correction.”

According to that study, 44 of the top 100 markets in America are overvalued by more than 25 percent. The two most overvalued cities are Detroit, Michigan, at 40.79 percent, and Atlanta, Georgia at 40.37 percent – the latter finding matching up with Gerli’s analysis. According to Axios, “Metro Atlanta’s expected average home value stood at $276,033 in May, but the actual sales price was on average $387,471.”

Dr. Ken H. Johnson, a real estate economist in FAU’s College of Business, noted specifically when it comes to Detroit that “eventually, prices will return to their long-term trends.” But, he added, “how they get there is the open question – will prices crash as they did after the last housing cycle’s peak or will home prices flatten out and slowly work their way back to the area’s trend? It will be one of the two.”

Real estate researcher Eli Beracha added that recent historical trends when it comes to housing corrections are rather ominous. “Ideally you want a housing market’s prices to remain close to its long-term pricing trend with only limited fluctuation around the trend,” she said. “Unfortunately, the last two housing cycles have been typified by dramatic swings in prices above and below markets’ long-term pricing trend.”

The housing market has been in a state of disarray since 2020. According to Fox Business, nationwide “available home supply remains down a stunning 34.3 percent from the typical amount before the COVID-19 pandemic began in early 2020.” Those who were fortunate enough to buy a home during that time period locked in record-low mortgage rates as modest as 2.75 percent.

When the Fed raised interest rates to combat inflation caused by record government spending, however, mortgage rates exploded. As a result, homeowners who otherwise would have considered selling and purchasing a new home are hesitant to do so as they would be paying much higher rates for much smaller loans. Experts refer to this as a “golden handcuffs effect.”

Traditionally, higher interest rates would lead to a decrease in housing prices. But amid continued supply shortages in most markets, prices remain high.

In other words, it’s the worst of both words for perspective buyers. But if a crash is indeed imminent, existing homeowners may soon find themselves facing a crisis of their own.

Andrew Shirley is a veteran speechwriter and AMAC Newsline columnist. His commentary can be found on X at @AA_Shirley.