Buyers bidding up homes have gotten carried away, according to a new report.
Fitch Ratings estimates that national home prices were overvalued by 5.5 percent as of November. In about a quarter of the country’s 392 metro areas, Fitch estimates, home prices are more than 10 percent too high.
Fitch said rapid housing price growth is out of step with the economy. While home prices have been driven up by historically low inventory and mortgage rates, income and employment metrics do not justify what buyers are paying.
“Slowing employment recovery and still-high unemployment levels are not supportive of long-term sustainable price growth,” said Suzanne Mistretta, a senior director at Fitch, in a statement. She defined sustainable as determined by market fundamentals, such as growth in incomes and households.
The report comes as national home price indices reported significant gains in the final months of 2020. The S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 10.4 percent for the year. In the final quarter of 2020 the Federal Housing Finance Agency House Price Index, tracking single-family homes, reported the largest quarterly increase in its five-decade history.
As housing prices and sales rebounded last spring and quickly surpassed levels recorded in previous years in the summer and fall, the housing market was viewed as a rare pandemic bright spot.
“Home sales are continuing to play a part in propping up the economy,” said Lawrence Yun, chief economist for the National Association of Realtors, when the trade group reported January’s increased sales pace of existing homes. “With additional stimulus likely to pass and several vaccines now available, the housing outlook looks solid for this year.”
Other economists are tempering expectations, warning that increasing home prices and tighter lending criteria that began in 2020 have shut less wealthy buyers out of the market and will eventually lead to a drop in demand.
Fitch attributes the surge in prices largely to changes triggered by the pandemic, such as consumer protection policies like forbearance plans, and new consumer preferences, namely the desire for larger living space.
If consumer protections are scaled back and lifestyle preferences change, Fitch expects price growth to slow and inventory to rise as distressed or previously hesitant owners finally put their homes on the market.
But the ratings agency doesn’t anticipate a reversal of the upward price trend anytime soon. Fitch forecasts home prices will rise between 1 percent and 3 percent this year and its overvaluation estimate will continue to increase in the first half of the year.