11 US cities overvalued as interest rates rise

  • Concerns about the housing bubble increase as mortgage rates rise, but house prices continue to climb.
  • Economist Ken Johnson advises against buying a home right now, saying the current market is “irrational”.
  • Insider breaks down Johnson’s analysis of the 11 most overvalued US cities.

Top analysts have begun to sound the alarm that the US housing market may be preparing for a major correction.

Home prices have hit all-time highs since the start of the pandemic in 2020 as inventories remain low and competition remains fierce. Median U.S. home prices rose 27% between the second quarter of 2020 and the fourth quarter of 2021, according to data from the Federal Reserve.

And the market isn’t calming down despite the recent increase in mortgage rates, according to an economist who studies home prices in 100 US cities.

Florida Atlantic University’s Ken Johnson explained why prices should stabilize when mortgage rates rise, but also advised buyers to steer clear of the current “irrational” market in a recent report. Despite continued price growth, Johnson says a handful of US cities have become significantly overvalued.

Mortgage rates


Federal Reserve

raised interest rates by 0.25 percentage points in mid-March in a bid to control inflation – which is currently raging at a four-decade high of 7.9%.

When interest rates and mortgage rates rise, house prices generally fall. But Johnson’s index showed that homebuyers still pay a premium in each of the 100 markets he studied.

“Eventually, mortgage rates will depress home prices, but that hasn’t happened so far,” Johnson said in the report. “We shouldn’t see rapid price increases as mortgage rates rise.”

“It’s this kind of exuberance that has led to recent housing recessions,” he added.

Rising mortgage rates can burst housing bubbles as they make home ownership less affordable and sometimes cause defaults and foreclosures. A


could also drive down property prices – and some analysts are already predicting an economic slowdown in the second half of 2022.

Overvalued cities

Buyers and investors should wait and see what happens when mortgage rates rise, rather than trying to play in a market that isn’t behaving rationally, Johnson said.

“You never want to buy near the top of the market,” he said. “Consumers need to take a break if their primary motivation is to buy, because they fear prices will rise even further.”

“Prices are high now, but still reverting to a long-term price trend,” Johnson added. “Staying where you are now and letting this irrational market take hold would be one of the best decisions you could ever make.”

Johnson and other researchers determine overvalued cities by measuring the gap between actual average home prices and historical trends that the average home price should be.

Boise, Idaho has been the most overvalued real estate market in the United States since last summer, according to the Johnson study. Boise buyers pay a 76% premium when buying a home.

Charlotte, North Carolina, entered the top 10 for the first time since the study began last year, with homebuyers paying a 50% premium. The researchers said this reflected “a sharp increase in population combined with a significant housing shortage” in southern cities.

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