Today’s U.S. real estate dilemma: Buy, build, sell now—or wait?

As the U.S. real estate market cools, many homeowners are wondering whether they should jump into today’s market quickly—or wait for a rebound. And if they do decide to outlast  this downturn, how long might their wait be? 

Our analysis finds that a good part of everyone’s answer (at least over the next one to two years) likely lies in where their property is located and, of course, their particular needs and goals.

Unlike the housing bubble that burst in 2006–2007 and depressed housing prices fairly uniformly across the country, we expect the impact of today’s higher interest rates on home values to vary significantly.

Our J.P. Morgan Private Bank 2022 analysis of 116 U.S. metropolitan areas (with a population of >500,000) sees housing prices taking three general paths in the next one to two years as higher mortgage rates and other economic factors increase pressure on the residential housing market:

1. Overvalued areas—such as Chattanooga, Boise and Phoenix—may see prices drop 20% to 30%.
2. Moderately overvalued areas—including Austin, Tampa and the New York metropolitan area—could potentially see dips of 10% to 15%.
3. Areas that are not overvalued—such as Denver, Miami and Washington, DC—are more likely to see prices hold.

If you are thinking about entering this housing market, you may want to ask your J.P. Morgan team to look into your area to help you decide what your best move might be, and when, especially in light of your personal financial goals.

If you are a potential buyer or builder, you might also speak with the team about establishing a line of credit so that you might quickly make offers or paper over construction delays without having to keep excess cash on hand and idle. Competition to purchase homes is still intense in many areas. Supply chain issues and labor shortages are still plaguing home construction.     

Housing fundamentals and long-term story are still strong

Despite this potential short-term volatility, the fundamentals of today’s housing market are strong—with sound prospects for the medium and long term. Even in the short term, we do not expect a dramatic downturn.

Indeed, there is unlikely to be a replay of 2006–2007, when the housing bubble burst. During that period, housing supply far exceeded demand, and the housing sector accounted for an unusually high percentage of U.S. GDP—just under 7%.

Today, housing is a much more reasonable share of GDP, at around 4.5%. Moreover, demand far exceeds supply. According to Freddie Mac, the United States is short 3.8 million housing units that would be needed to keep up with household formation.¹

Another of the many differences between then and now is that the current housing market is shaped by people leaving higher-cost cities such as San Francisco and New York. The COVID-19 pandemic greatly accelerated this migration. The new hybrid and remote work opportunities inspired by the lockdown may continue to reinforce this trend.   

These population shifts are major causes of the current and potentially continuing significant disparities in housing valuations across U.S. metropolitan areas.

Our analysis

How can we tell which areas’ housing is overvalued, and by how much?

For a metro area, we looked at the ratio of its median home price to its population’s median income.  Then we compared:   

• How much that ratio increased from pre-pandemic to today
  
• How high that ratio is relative to the area’s history²
• How high that ratio is relative to the current national average    
  

The average of these three “Z-scores” (i.e., the standard deviation from the mean) gave us the final score of how overvalued a metro area’s housing market might be. 

It is of course impossible to know for certain how far might prices fall, given these estimated overvaluations. However, history suggests that the housing market goes through a correction when we experience the types of interest rate shocks and valuation excesses we’re seeing today. 

In 2022 alone, the Federal Reserve’s four hikes had increased rates by a combined 2.25 percentage points as of early August. As of this writing, the average 30-year fixed-rate mortgage is around 6.05% versus just 3% at the start of the year. In April, the U.S. housing market started to show signs of softening. Redfin data illustrates that as of July 30, there has been a sharp uptick in the number of listed homes that have had price drops.

Suddenly, the housing market softened in 2022 

Of course, in some cases, it may simply be that growth in local industry has yet to catch up. For example, although Austin and Phoenix are probably quite similar, Phoenix shows up as more overvalued. Both metro areas have diverse industries and have been attracting more people. It’s just that in Phoenix, home prices have gotten a bit ahead of what the fundamentals suggest they should be, according to our framework.

How overheated is your local housing market now? 

Chart description: This representative list segments major metros into the buckets “overvalued,” “moderately overvalued” and “not overvalued” based on our analysis of local housing market valuations. Based on our analysis, housing markets categorized as either “overvalued” or “moderately overvalued” could potentially see price decreases in the near future, while home values in metros in the “not overvalued” bucket will likely hold steady.

How might this information affect decisions?

We always tell clients that first and foremost they should consider their needs and goals. Specific market data alone should not drive their decisions.

That said, this information about the housing market can prove useful. For example, this spring, a client received unsolicited offers to sell his Tampa vacation home at a price that was double what he’d paid for the property just one year ago. Given that the Tampa area might see a price correction, he was well advised to consider selling.

In contrast, if you plan to live five years or more in an area that is currently overvalued, you still have ample time to wait out the potential housing market correction.

Clearly your time horizon and the use to which you intend to put the property (primary residence or vacation home) should shape your decisions. In addition, you may want to keep these sound principles in mind:

• Pricing adjustments and comparisons—Buyers should look hard at supposed bargains right now. Markdowns and comparisons to recent sales (in the last six to 12 months) may be no bargain but instead a sign that the initial asking price or local market were inflated.     
• Local expertise—Given that pricing a property for sale is tricky in today’s softening market, sellers should be sure to work with a seasoned realtor who knows the local market and luxury space. They also might have to be flexible when negotiating final terms.
• Mortgage structure—When valuations are lowering and interest rates have risen, buyers may want to more carefully consider the size of their down payments (to maintain sufficient equity) and determine whether a fixed-interest or an interest-only mortgage makes more sense. You might also look into tax-aware borrowing strategies that would help lower the effective borrowing rate.

Get all the facts before you make your decision. Speak with your J.P. Morgan team about what is happening in your area. Discuss financing strategies that make sense in the context of your circumstances. And make sure that whatever you decide, it supports your overarching, long-term goals.