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Homes are overvalued in most of the US – and the problem is worse in these five states

An overwhelming majority of homes in the US are overvalued as high mortgage rates and a persistent housing shortage drive up real estate prices even further.

A new report published by Fitch Ratings shows that homes were overvalued by 11.1% at the end of 2023, a trend seen in about 90% of U.S. metropolitan areas.

But the increase in the number of homes sold at prices above the long-term average was noticeably higher in a handful of Southern states.

Tennessee, Arkansas and South Carolina saw the strongest increases in overvalued homes, followed by Montana and Alabama.

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There are a number of driving forces behind the price spike.


Years of underconstruction created a housing shortage in the country, a problem later exacerbated by the rapid rise in mortgage rates and expensive building materials.

Available housing supply remains a whopping 34.3% lower than the average number before the COVID-19 pandemic began in early 2020, according to a separate report published by Realtor.com.

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Higher mortgage rates over the past three years have also created a ‘golden handcuff’ effect on the housing market. Sellers who secured record low mortgage rates of 3% or less at the start of the pandemic have been reluctant to sell, further limiting supply and leaving few options for eager potential buyers.


A neighborhood in Washington state

Homes in the Issaquah Highlands area of ​​Issaquah, Washington, on April 16, 2024.

While an increase in home listings in certain markets is a welcome sign pointing to “early signs of normalization,” Fitch said that “the pace is dampened by persistently high mortgage rates and escalation in home prices.”

Economists predict that mortgage rates will remain high through 2024 and will only start to fall when that time comes Federal Reserve starts lowering rates. Even then, interest rates are unlikely to return to the pandemic lows. In addition, investors are becoming more skeptical about the chances of a Fed rate hike this year given the string of better-than-expected inflation reports at the start of the year.

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Mortgage buyer Freddie Mac said Thursday that the average interest on a loan with a term of 30 years dropped to 7.02% last week. While that’s down from the fall 2023 peak of 7.79%, it remains significantly higher than the pandemic-era low of just 3%.

For sale sign outside a house in AtlantaFor sale sign outside a house in Atlanta

A sign at a home for sale in Atlanta, Georgia on September 6, 2023.

According to a separate Zillow survey, most homeowners are almost twice as willing to sell their home if their mortgage interest rate is 5% or higher. Currently, approximately 80% of mortgage holders have an interest rate lower than 5%.

A separate study from Redfin shows that the combination of steep mortgage rates and high home prices has pushed average monthly home payments to an all-time high. record $2,775 – an increase of 11% compared to the same time last year.

“Market conditions for homebuyers remain challenging as few homes remain on the market and ownership costs continue to rise,” said Ben Ayers, Nationwide’s senior economist. “Despite strong demographic demand drivers and a strong labor market, many first-time buyers are being shut out of the market by higher financing rates and rising prices.”

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Original article source: Homes are overvalued in most of the US – and the problem is worse in these five states

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