In the period that ended in December 2008, home prices in several markets had dropped over 30% year over year. In Merced, California, the figure was 49.5%, while in nearby Stockton, the drop was 40.19%. The plunge in Riverside, California, was 30.32%; in Naples, Florida, it was 32.87%; and the drop was 32.60% in Las Vegas, Nevada.
What happened? In part, it was because adjustable mortgage rates had reset at very high levels. Another reason was the unemployment rates brought on by the Great Recession. Perhaps most importantly, housing prices had soared to unsupportable levels in 2005 and 2006. Put another way, tens of thousands of homes across America were too expensive for their prices to be sustained.
Over the next 12 months, there will be another home price reset? Will it be as bad as in 2008? The answer is that, in some areas where home prices have soared, there could be another crash.
Florida Atlantic University keeps a list of the most overvalued markets. This list recently was topped by Boise, Idaho, which was overvalued by 75%. It was followed by Austin, Texas, at 66%; Ogden, Utah, at 63%; and Las Vegas at 60%. The latter was among the cities that had the worst drop in 2008.
These overvalued cities have one thing in common. There have been huge influxes in population in the past two years, which shows little sign of ending.
Housing demand has been more robust in the past two years than at any time in the past seven decades. Perhaps, the market was as hot just after World War II.
Two things soon will be the enemies of housing in the United States. The first is rising interest rates, which will affect mortgages. The other is a recession triggered by inflation and trouble in some industries brought on primarily by supply chain challenges.
Housing prices are in for a reset.
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