Unemployment Drives Highest US Home Price Overvaluation Since Financial Crisis

Fitch Ratings-New York-26 June 2020: Elevated unemployment brought on by the coronavirus pandemic will likely translate to frothier markets throughout the U.S. over time, even though U.S. home prices posted their largest quarterly gain since 2018 pre-pandemic in 1Q20, according to Fitch Ratings in its latest quarterly U.S. sustainable home price report.

National home prices, which grew approximately 5.7% annually in 1Q20, are currently over 6.1% overvalued as per Fitch's calculations. Rising home prices, elevated unemployment, and lower income and rents will increase the vulnerability of the housing market. Fitch expects downward pressure on home prices for the next several months even with lower projections for unemployment in 2020 (10.3% per Fitch estimates) and 2021 (approximately 7.8%).

"The magnitude of the rise in unemployment is having an outsized impact on Fitch's home price overvaluation estimate for this quarter," said Senior Director Suzanne Mistretta. As a result, the next several months will be critical for home prices. "To what degree housing markets become more overvalued will depend on the trajectory of both unemployment and nominal income, both of which have a lasting impact in our estimates," said Mistretta.

If home price growth remains at 4% for 2020, the downside economic scenario will push home price overvaluation to 8.6% by end of this year. This would be Fitch's highest rate of overvaluation in over a decade. However, if the unemployment rate forecast is revised lower, but still elevated, and home prices finish out the year at 4% growth, Fitch's home price overvaluation will be around 7% at the end of 2020.

This means more pressure for already frothy housing markets like Nevada, (25%-29% overvalued), where the unemployment rate spiked to 28% in April because of business shutdowns related to the coronavirus and lingering concerns in leisure and hospitality. Other overvalued states likely to feel more pressure in the coming months include Idaho (30%-34% overvalued), North Dakota (20%-24% overvalued), Texas and Arizona (both 15%-19% overvalued).

Fitch's expected losses on RMBS transactions are anticipated to increase as a result of the rising overvaluation. The magnitude of the increase could be as high as 150 bps for 'AAAsf' classes, varied by product sector and geographical distribution of assets.