11 US Overvalued Cities As Interest Rates Rise

  • Housing-bubble concerns are growing as mortgage rates rise, but home prices continue to climb.
  • The economist Ken Johnson advises not buying a house right now, saying the market is “irrational.”
  • Insider breaks down Johnson’s analysis of the 11 most overvalued American cities.

Top analysts have started sounding the alarm that the American housing market may be headed for a major correction.

Home prices have soared to unprecedented highs since the start of the pandemic in 2020, as inventory remains low and competition remains stiff. Median US house prices rose 27% between the second quarter of 2020 and the fourth quarter of 2021, according to Federal Reserve data.

And the market isn’t cooling off despite mortgage rates’ recent increase, according to an economist who surveys house prices in 100 US cities.

In a recent report, Florida Atlantic University’s Ken Johnson said prices should level off with the mortgage-rates rise but recommended that buyers sit out the “irrational” current market. Despite continued price growth, Johnson said a handful of US cities had become significantly overvalued.

Mortgage rates


Federal Reserve

hiked interest rates by 0.25 percentage points in mid-March as it looked to control inflation — which is running rampant at a four-decade high of 7.9%.

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

“Eventually mortgage rates will slow down home prices, but it hasn’t happened so far,” Johnson said in the report. “We should not see rapid upticks in prices as mortgage rates rise.” 

He added: “It’s that kind of exuberance that led to past housing downturns.”

Rising mortgage rates can pop housing bubbles because they make homeownership less affordable and sometimes cause defaults and foreclosures. A


could also cause house prices to crash — and some analysts are predicting an economic downturn in the second half of 2022.

Overvalued cities

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

“You never want to buy near the top of the market. Consumers need to pause if their main motivation is to buy because they fear prices will rise even higher,” he said.

“Prices are high now, but they always moderate back toward a long-term pricing trend,” Johnson added. “Staying where you are now and letting this irrational market settle would be one of the best decisions you could make.”

Johnson and other researchers determine overvalued cities by measuring the gap between average house prices and what historical trends indicate the average house price should be.

Boise, Idaho, has been the US’s most overvalued housing market since the summer, according to Johnson’s study. Boise buyers pay a premium of 76% when buying a house.

Charlotte, North Carolina, broke into the top 10 for the first time since the study began last year, with homebuyers paying a 50% premium. Researchers said this reflected “large population increases combined with a significant shortage in housing inventory” in Southern cities.

Read More: 11 US Overvalued Cities As Interest Rates Rise

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