Overpriced Housing - An Analysis

In a new report analyzing the U.S. housing market, Moody's chief economist Mark Zandi concludes that the pandemic has boosted home prices in parts of the country far beyond the typical coastal hot spots. Communities across Virginia have been impacted, though perhaps not as much as places like Boise, Idaho, where homes are as high as 73% overpriced.

The report defines a given housing market as overvalued when property costs in the area are "well above" the historical relationship between home prices and incomes, rents, and construction costs.

While Virginia communities are not (yet) the magnet for tech workers as Boise and Austin are, several communities like Winchester and Fredericksburg are growing with D.C. area families looking for a more bucolic and affordable lifestyle now that their employers are allowing them to work where they live.

How prices have changed in Virginia Localities

According to Moody's Analytics, homes in 97% of cities nationwide are overvalued based on how much their current price exceeds the historical relationship between house prices and local household incomes, rents, and construction costs. Here are the communities and cities in Virginia that Moody's analyzed and where home prices stand.

City	Overvaluation Percentage Change
Blacksburg-Christiansburg-Radford	+18%
Bristol	+44%
Charlottesville	+7%
Harrisonburg	+9%
Lynchburg	+23%
Richmond	+22%
Roanoke	+28%
Staunton-Waynesboro	+18%
Winchester	+9%

Buyer's Remorse

Many new homeowners are questioning whether overpaying for their homes was unwise. Experts have ways to address this.

Moody's anticipates home values in overpriced markets will fall as much as 10% over the next ten years. Patrick Chism, with Rocket Mortgage, has a solution to minimizing that loss:

"You can apply extra payments directly to the principal balance of your mortgage," he said. "Making additional principal payments reduces the amount of money you'll pay interest on – before it can accrue. This practice can knock years off your mortgage term and save you thousands of dollars."

If this approach isn't feasible, financial experts say that homeowners who carefully examined their budgets to follow the guiding principle of spending no more than one-third of gross income on housing costs (including mortgage, property tax, insurance, and maintenance) their fears should be assuaged.

Jeff Tucker with Zillow believes that if homebuyers think they can be happy in a home and stay there for 5+ years, an argument can still be made to forge ahead with a purchase. Homeowners will likely recoup any losses by locking in a rate now, even if higher than earlier in the pandemic. As rents are also rising significantly and will likely continue to do so, homeownership is a way to manage budgets with greater clarity while building equity.

Could We Be Looking At A Repeat Housing Crisis like the mid-2000s?

This analysis will leave many questioning whether the housing market faces another bubble similar to the one the U.S. experienced in the Great Recession in the 2000s.

Zillow's Tucker says these concerns are likely misplaced. "There are a lot of stark differences with the mid-2000s," he said.

"Today's market irregularities are attributed to an imbalance between supply and demand, while the housing bubble in the mid-2000s was caused by wider access to mortgage financing," states Odeta Kushi, deputy chief economist with First American. "This time around, household finances are stronger and home values remain at historic highs."

There are some similarities to the mid-2000s housing boom, but the key difference is the type of buyer in today's market. "One of the big differences is homebuyer quality," says Kushi. This cycle, we have far more stringent lending rules."

Homeowners who carefully considered their finances before purchase and stuck to the 33% housing expenses rule will not face the foreclosure crisis we saw before.

Did you purchase a new home during the pandemic? How do you feel about it? Are there any regrets or is it perhaps the best decision you've made given the lifestyle changes provided? Let us know.

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Sources: CBS News, Rocket Mortgage, Insider