While the lack of homes for sale is a clear tailwind for U.S. home prices, deteriorated housing affordability—the result of mortgage rates spiking from 3% to over 6% just after national house prices soared over 40% during the Pandemic Housing Boom—remains a clear headwind for prices. That's according to the latest report by Morningstar.
Researchers at Morningstar, a leading investment research firm, put out a new paper predicting that the national housing market is still passing through a "modest price correction." By the time national prices bottom in 2024, Morningstar expects house prices to be down between 4% to 6% from the peak. That'd pale in comparison to the 27% peak-to-trough decline that national house prices saw during the crash between 2007 and 2012.
"Several factors today support continued price resiliency, mainly the rate lock-in effect, over a decade of conservative lending standards (which reduces foreclosure risk), and undersupplied U.S. housing stock (we estimate about a 2.5 million-unit shortfall). However, we believe that buyer exuberance during the pandemic, aided by ultralow borrowing costs, pushed home prices to an unmaintainable level in some markets," wrote researchers at Morningstar.
In order for Morningstar to nail its forecast, the home price correction would need to regain momentum in the second half of the year, when the market passes through its seasonally slow window. However, even if price declines regain momentum, the firm acknowledges that many regional markets could dodge declines altogether.
To better understand which regional housing markets are at the highest level of risk (and the lowest level of risk), Morningstar calculated a "risk score" for the nation's largest housing markets.
"We compiled data from the Atlanta Federal Reserve, U.S. Census Bureau, and Zillow to create a risk scoring tool for metro-level home prices. We deem metros with the worst affordability, negative population growth, and rising for-sale inventory and average days on market, among other factors, as most at risk for home price corrections," wrote Morningstar researchers.
Let's take a look at the 15 housing markets with the highest level of correction risk—and the 15 markets with the lowest level of risk.
View this interactive chart on Fortune.com
The 15 major markets deemed to have the highest level of risk includes San Diego; Austin, Texas; Colorado Springs, Colo.; Provo, Utah; Nashville; Oxnard, Calif.; Seattle; Ogden, Utah; Denver; Portland, Ore.; San Jose, Calif.; Honolulu; Los Angeles; San Francisco; and Salt Lake City.
"Our risk scoring tool indicates that Salt Lake City is the most at-risk metro for home price correction. While the city has seen modest population growth, it's become one of the least affordable markets, for-sale inventory is up nearly 50%, and average days on market is up over 300% year over year," wrote Morningstar researchers.
Nationally speaking, the home price correction—with U.S. home prices in April 2023 only 2.4% below the June 2022 peak—has been tame. However, the housing correction has been steeper in many overheated Western housing markets, with places like Austin and Boise having already seen around 10% price declines.
The previous decade's tech boom combined with an acute housing shortage saw home prices in many Western markets get hyperextended from fundamentals, like price-to-rent ratios. Those strained fundamentals made Western housing markets, in particular, vulnerable to fallout from last year's mortgage rate shock.
View this interactive chart on Fortune.com
"And while home prices are down by a high-single-digit to low-double-digit percentage in historically unaffordable Western markets (for example, San Francisco) or markets that saw a migration surge during the pandemic (for example, Austin, Texas, and Boise, Idaho), prices in relatively more-affordable markets have been more resilient than we anticipated," wrote Morningstar researchers.
Heading forward Morningstar thinks "relatively affordable" Northeast and Midwest markets will continue to be at lower risk for correction.
Indeed, the 15 major markets deemed to have the lowest level of risk are almost entirely in the eastern half of the country. Those "low-risk" markets include Hartford, Conn.; Syracuse, N.Y.; Allentown, Pa.; New Haven, Conn.; Harrisburg, Pa; Rochester, N.Y.; Augusta, Ga.; Toledo, Ohio; Little Rock, Ark.; Wichita, Kan.; Baton Rouge, La.; Akron, Ohio; Cleveland, Ohio; Scranton, Pa.; and Virginia Beach, Va.
"We see Hartford, Connecticut, as least at risk for a price correction. The city's population is growing modestly, median household income can afford a median-price home, inventory is still declining, and average days on market remains stable," wrote Morningstar researchers.
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