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The economic fallout of COVID-19 continues to haunt American house hunters. In 2021, while most of us were still wearing masks in public and looking out for our elderly neighbors, home prices became scorchingly hot. Prices rose faster in 2021 than ever before, and the typical home suddenly gained $50,000 in value.
While prices have cooled slightly in some areas, that’s not true everywhere. And as much as a house hunter might want to purchase a new home, here are 10-plus cities where it simply makes no financial sense.
Overvalued homes
Have you ever wondered what would happen if interest rates dropped, more homeowners put their houses on the market, and the influx of new inventory drove the price of homes downward? The experts have.
Researchers at Florida Atlantic University and Florida International University used publicly accessible Zillow data to determine where the most overvalued homes are located. They compared current prices to pre-pandemic values to get a sense of what would happen if a market correction occurred.
Will prices crash like they did after the last housing cycle peak, or will they flatten out and slowly work their way back to “normal”?
Researchers looked at the 100 most populous metro areas in the U.S. and found that 98 continue to sell property at a premium. If prices stabilize, those who’ve purchased a home in the past few years could watch their investment lose value. Those who took out a new mortgage to make the purchase could also end up owing more than the property is worth.
Here are the 10 cities Florida researchers found to be the most overvalued and by how much prices are inflated:
- Detroit: 40.79%
- Atlanta: 40.37%
- Las Vegas: 37.53%
- Knoxville, Tennessee: 37.33%
- Cape Coral, Florida: 36.11%
- Tampa, Florida: 35.98%
- Charlotte, North Carolina: 35.09%
- Palm Bay, Florida: 34.94%
- Orlando, Florida: 34.29%
- Lakeland, Florida: 34.06%
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A lopsided correction?
If and when a market correction occurs, homeowners in some cities will likely feel the impact more than others. For example, homeowners in areas that regularly enjoy an influx of new residents may experience a smoother price transition. Home prices in those cities may take years to approach their new normal.
In the meantime, without a crystal ball, it’s impossible to know which areas of the country are likely to be hardest hit. Still, based on the CoreLogic Market Indicator (MRI), these five markets are at the highest risk of declining home prices over the next 12 months:
| Metro Area | Level of Risk of Price Decline |
|---|---|
| Prove-Orem, Utah | Above 70% |
| Salt Lake City, Utah | Above 70% |
| Atlanta-Sandy Springs-Rosewell, Georgia | Above 70% |
| Tucson, Arizona | Above 70% |
| Palm Bay-Melbourne-Titusville, Florida | Above 70% |
What you can do
Eli Beracha, Ph.D., director of Florida International University’s Hollo School of Real Estate, told CoreLogic, “Housing prices can and will re-stabilize. The only question is how local home prices will return to a given area’s long-term pricing trend.”
Beracha wonders if prices will fall fast enough to extinguish all worries about affordability or if the return to long-term pricing trends will be so slow that homeowners will retain the newfound equity in their property.
Confusing the subject even more is the fact that every housing market is a world unto itself. While homes in some areas may retain equity, values in others may plummet.
Whether you’re a homeowner or a potential buyer, here are a few tips for making the most of your situation:
| Homeowner | Potential Home Buyer |
|---|---|
| Keep your home in tip-top shape. No matter what happens, a well-maintained home will appraise for more than a poorly maintained home. Your goal is to maintain as much equity as possible. | Keep an eye on your credit score. If it’s lower than you would like, take steps to boost it. The goal is to be ready to apply for a new mortgage. |
| Get involved in your neighborhood watch. Homes in areas with low crime rates generally receive a higher appraisal value and are in higher demand. | Pay attention to pricing trends. If prices drop faster in some areas than others, consider buying a home in the lower-price area. |
| Take an interest in area schools. Even if you don’t have children in school, studies reveal that property values rise by about $20 for every $1 in school funding. | Continue to save. The ideal situation involves having enough for a large down payment and an emergency savings account with enough deposited to cover three to six months’ worth of bills. |
Even if buying in your dream city doesn’t make sense today, home prices and mortgage rates can (and do) change. The U.S. housing market has experienced wild fluctuations in pricing before but managed to recover.
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