Moody’s Analytics Chief Economist Predicts Housing Correction and Improving Market Fundamentals

Pic Source: Fortune

In May 2022, Mark Zandi, the chief economist at Moody’s Analytics, made a bold prediction about the housing market. He stated that the market had reached its peak and a housing correction was imminent. Zandi anticipated that national home prices would remain stagnant, while cities like Boise and Austin, known for their frothy housing markets, would experience a decline of 5% to 10% in home prices.

Zandi attributed this forecast to the Pandemic Housing Boom, which had caused home prices in many markets to become detached from local income levels and other fundamental factors. In the second quarter of 2022, Moody’s Analytics estimated that the U.S. housing market was overvalued by 26.98%, surpassing the peak overvaluation during the housing bubble era in the fourth quarter of 2022, which stood at 22.22%. This overvaluation was significantly higher than the 2.17% recorded in the second quarter of 2018.

Now, as we fast-forward to spring 2023, the underlying fundamentals of the housing market are already showing signs of improvement. Zandi’s prediction proved to be accurate as the housing market did enter a correction phase in the latter part of 2022, leading to a decline of around 10% in prices in overheated markets such as Austin and Boise. With falling prices in these hot markets and increasing household incomes, the housing market in spring 2023 is not as overvalued as it was in spring 2022.

A recent analysis conducted by Moody’s Analytics reveals that the U.S. housing market was overvalued by only 16.85% in the first quarter of 2023, indicating an improvement of nearly 10 percentage points from the second quarter of 2022. Even in Boise, which had an overvaluation of 71.48% in the second quarter of 2022, the level of overvaluation has decreased to 54.02%. This analysis provides a comprehensive view of the overvaluation or undervaluation scores for the 440 largest markets in the United States from the first quarter of 2000 to the first quarter of 2023.

The question now arises: Will housing market fundamentals continue to improve beyond the first quarter of 2023? Housing economists, closely monitoring the rise in home prices in most regional markets this spring, have differing opinions on the matter.

Firms like CoreLogic and Zillow predict that the limited inventory levels will drive national home prices up by 4.6% and 4.8%, respectively, over the next year. If these optimistic forecasts materialize, it would indicate a halt to the ongoing healing of the housing market fundamentals.

However, if Zandi’s predictions hold true, the overvalued levels will continue to decline. As mortgage rates surged in 2022, Zandi revised his outlook. In October 2022, he forecasted a decline of around 10% in national home prices from peak to trough, with the expected bottom occurring in 2024 or 2025. Moody’s Analytics forecast model predicts an 8.6% peak-to-trough decline nationally, including a 4.4% decline in 2023 alone.

For Zandi’s prediction to come true, overheated regional housing markets would need to once again enter a correction phase during the slower months later this year.

Out of the 404 largest markets tracked by Moody’s Analytics, 17 are currently undervalued. These include markets such as Chicago and Baton Rouge, as well as San Francisco, which was significantly affected by the housing correction in the second half of 2022.

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