Before governors relaxed stay-at-home orders two years ago, white-collar professionals were already fleeing their exorbitantly priced apartments in cities like San Francisco and Seattle. The biggest beneficiary of that WFH homebuying wave was undoubtedly Boise—where home prices skyrocketed 53%. You could even call it the poster child of the pandemic housing boom.
But that Boise honeymoon is over. While spiking mortgage rates have pushed the overall U.S. housing market into a slowdown, it has delivered a particularly hard blow to the Boise housing market. That has seen both Boise home sales plummet—down 28% on a year-over-year basis—and inventory levels surge—up 161% this year. It’s also chipping away at home values. According to Zillow, the median Boise home sales price fell 3.5% in June.
The downward slide in Boise has only just begun. That’s according to Rick Palacios Jr., head of research at John Burns Real Estate Consulting. By December, the real estate research firm projects that home prices will be negative in Boise on a year-over-year basis. In order for that to happen, Boise would not only have to lose all of its 2022 gains—which is already starting to happen—but also fall under its December 2021 price. Boise isn’t the only market that has seen its home price “top” blow off. Markets like Phoenix and Austin have also, Palacios says, entered into a downward slide.
“You could make a strong case that in a lot of housing markets the last 10% of home price appreciation was purely aspirational and irrational, and that’ll come off the top really fast,” Palacios says. “That’s exactly what we’re all seeing right now.”
What’s going on? Regional housing markets that became the most detached from underlying economic fundamentals are now cooling fastest. These bubbly markets, including places like Denver and Nashville, simply saw home prices climb too high during the pandemic. Once historically low mortgage rates disappeared this spring, would-be buyers began to feel the full brunt of record home price appreciation. Many home shoppers quickly called off their search.
How did markets like Boise and Phoenix get so bubbly? Ali Wolf, chief economist at Zonda, blames supply constraints in those markets. The demand influx—which the Federal Reserve pinpoints as the culprit of the Pandemic Housing Boom—simply overwhelmed supply in Western boomtowns. That saw bidding wars that took prices far beyond fundamentals.
"Many markets in the West are landlocked for one reason or another, whether [by] the ocean, mountains, national parks, or growth boundaries. As a result, building is more limited in these markets compared to parts of the country with less regulation and more developable land," Wolf tells Fortune. "The strong demand over the past two years drove up home prices across the country, and it appears the West hit the pricing ceiling quicker than other markets given the particular supply constraints."
John Wake, an independent real estate analyst based in Phoenix, tells Fortune that investors also helped push those markets too high. A combination of record appreciation and historically low rates was too good of a deal for mom-and-pop landlords and institutional players alike to pass up on.
On the way up, lots of investors can help. Conversely, investors can also help push a market down faster once it turns over.
"Investors sometimes move in a herd. If Phoenix real estate isn’t the cool investment anymore in 2022, it could have a big and quick impact on home sales. If a lot of investors decide to sell…yikes. Live-in owners don’t sell just because they think it’s the top of the market or because prices are fading but investors will and we have a lot more investor-owned houses now than we used to," Wake tells Fortune.
Where are we headed next? According to Moody's Analytics, U.S. home prices are set to flatline by this time next year. Meanwhile, significantly "overvalued" housing markets like Boise and Austin are headed for a 5% to 10% trimming over the coming year. That assumes no recession. If a recession hits, Moody's Analytics projects a 5% U.S. home price decline and 15% to 20% declines in significantly "overvalued" housing markets.
John Burns Real Estate Consulting is even more bearish. Not only does the firm project that U.S. home prices will fall in 2023, it also projects that U.S. home prices will fall in 2024. It forecasts the biggest 2023 home price drops will occur in Boise; Phoenix; Nashville; West Palm Beach, Fla.; Las Vegas; Port St. Lucie, Fla.; Riverside, Calif.; Fort Myers, Fla.; Austin; and Visalia, Calif. (John Burns Real Estate Consulting only provides the numerical forecast figure to its paid clients.)
Over the past two years, home prices in bubbly markets like Austin and Phoenix have jumped a staggering 61% and 59%, respectively. But don't be surprised if those markets lose a chunk of those gains.
"If you don't think that we need to give some of that back, then I don't know what planet you're on. It doesn't make sense," Palacios says.
Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
