House Prices Are Most Overvalued in These 11 States

The booming housing market has started slowing down, as analysts expect rising mortgage rates to drive down demand and prices in the coming year.

As the national market braces for a correction that could affect every state, according to analysts, home prices aren't falling as quickly as mortgage rates are rising, or by as much as many aspiring homebuyers might wish.

The housing market remains 12.2 percent overvalued on a national level, Fitch Ratings said, and 23.3 percent overvalued, according to Moody's Analytics as of September 30.

Comp Image, Housing Market US
A combination image representing the housing market. Home prices aren't falling as quickly as mortgage rates are rising. iStock / Getty Images

"In the last 18 months we have had some rapid home price growth, so home prices in certain markets have grown so fast that we see that as being unsustainable," Kevin Kendra, managing director of Fitch Ratings, told Newsweek.

"But really, what you see happening now [in these areas] is that home prices are starting to correct a little bit."

While prices have been slightly, but consistently, dropping in the most overvalued states since June, the states that experienced the biggest home price increases in the pandemic still look the most overvalued in the entire country.

"Prices are holding up better in the Northeast and Midwest. And that's not a surprise to me," Moody's Analytics Chief Economist Mark Zandi told Newsweek.

"Those markets are just more stable. Generally, they don't rise as much in the good times and they don't fall as much in the bad times. So it's not a surprise that they are holding up a bit better at the moment."

The top 10 most overvalued housing markets in the U.S., according to Moody's Analytics, are as follows:

  1. Idaho (57.1 percent as of September 30)
  2. Tennessee (48.0 percent as of September 30)
  3. Nevada (47.9 percent as of September 30)
  4. South Dakota (46.1 percent as of September 30)
  5. Arizona (43.9 percent as of September 30)
  6. Hawaii (42.8 percent as of September 30)
  7. North Carolina (42.4 percent as of September 30)
  8. South Carolina (40.3 percent as of September 30)
  9. Georgia (38.6 percent as of September 30)
  10. Colorado (34.9 percent as of September 30)
  11. Florida (34.9 percent as of September 30)

"Those are areas where prices rose sustainably relatively to incomes and construction costs. At the end of the day, the value of a home is equal to the value of the land upon which the home resides, and the value of the structure, how much it costs to build the home," said Zandi.

"Nationwide, roughly half the home value is the land, half is the construction costs. But that varies a lot right across the country. So, in San Francisco, for example, 90 percent of the home is the land and 10 percent is the structure. In a place like Pittsburgh, PA, it's the opposite, 90 percent is the structure, 10 percent is the land.

"But in those areas that are really juiced up, where prices rose significantly relatively to incomes and construction costs, this is where overvaluation is is the greatest."

Another factor that contributed to current valuations is the switch to remote working. It's still not clear to what extent that trend will continue.

"In the pandemic, a lot of people moved because they could, because they work remotely and they could leave the big cities on the Northeast and the West Coast for the Mountain West and the South. And there they really juiced up prices because they were used to very high house prices from where they were living and were willing to pay a lot higher price in the places where they were moving to. But now remote work is moderating and in some cases is is reversing."

As people move back to the big cities of the Northeast and the West Coast, Zandi said, the most overvalued markets are cooling down.

"Boise is a poster child for that. Phoenix is a poster child. Austin is a poster child. Even Tennessee, Nashville—a lot of people moved to Tennessee during the pandemic to take advantage of remote work. And now that those areas aren't benefiting nearly as much because remote work flow has slowed sharply."

All of the other states' housing markets in the U.S. are also overvalued, according to Moody's, withe the exception of Maryland.