Downward angle icon Downward angle icon. Homes in towns that boomed during the pandemic are overvalued by up to 30%, Reventure’s Nick Gerli estimates. tommy/Getty Images The pandemic is set to bring a steep drop in home prices in hot markets, according to Reventure CEO Nick Gerli. Gerli believes the South is in a real estate bubble that’s about to burst. Some booming towns have a lot of inventory on the market that could weigh on prices, he said.
Potential homebuyers might want to stay on the sidelines: While prices are set to plummet in key areas of the real estate market over the next few years, one analyst says the market is headed for a rare buying opportunity.
Nick Gerli, CEO of real estate analytics firm Reventure, believes South home prices are set to fall by double digits over the next few years as the region boomed during the pandemic and now sees a slowdown in demand and a flood of housing inventory, he told Business Insider.
He believes it’s reasonable for prices in the region to fall by 20% over the next few years, with a 15% drop in prices possible over the next 12 months.
That alone won’t make the housing market more affordable, but if prices continue to fall, mortgage rates stay lower and incomes in the South continue to rise, it could create better opportunities for homebuyers in the coming years, he said.
“I don’t expect homebuyers to look at this and think, ‘I need to rush out and buy,'” Gerli says. “It’s unrealistic to expect everything to drop to the price you want overnight. But if you’re patient and do enough research, there will be plenty of good buying opportunities in the next two to three years.”
Bursting of the bubble
In today’s market, opportunities for buyers are rare, with most prospective homebuyers hampered by high interest rates and limited inventory.
These factors have created the most expensive housing environment in the United States in decades. Home prices rose to a record $419,300 in May, according to the National Association of Realtors. Borrowing costs remain high, too, with the 30-year fixed mortgage rate falling slightly last week to 6.89%, according to data from Freddie Mac.
But the story is different in fast-growing cities in the South, Gerli said, because those areas are just coming to the end of a pandemic-induced construction boom. Citing U.S. Census data, Gerli said new housing inventory in the South was about 299,000 units as of July, a record high.
But demand in the region is now starting to slip: Home sales have stagnated in key states like Florida, which is losing its appeal as a retirement haven for baby boomers, according to Redfin data.
Still, new homes are being added to the market at a rapid clip: Southern homebuilders are readying nearly 8.9 months’ supply of new homes. That’s not far from the peak in 2008, when Southern homebuilders had about 10.8 months’ supply on the lots, according to a Reventure analysis based on Census data.
As a result, the imbalance in supply and demand in the region could grow sharply, causing prices to fall, Gerli predicted.
“Demand for new homes has fallen significantly as a result of the pandemic, and now there are more homes for sale in the south than ever before, which is likely to further drive prices down,” Gerli told BI.
Gerli said the situation in the southern housing market was similar to past housing bubbles, citing local government data that showed home prices in major cities have risen 50% to 70% since the pandemic, while incomes have only risen 10% to 20%.
This leads him to estimate that property values in Sunbelt states are overvalued by about 30%, but the bubble could easily burst with the surge in inventory coming online.
The U.S. economy also remains unstable. If the economy falls into recession or the unemployment rate rises above 7%, demand for homebuying could fall and home prices could fall by double digits, Gerli predicted.
“Business cycles tend to follow the housing market cycle,” he added. “Unemployment has risen significantly. Interest rates are at their tightest in 20 years. At some point we’re going to have a recession. No one knows when, but if we do, it’s clearly not going to be good for the housing market.”
Home prices have already started to fall in major Southern cities, with Florida and Texas in particular containing seven of the 10 cities in the country with the fastest price declines, Redfin said in a recent report.
Gerli said it will take a long time for housing to become more affordable overall, given that the housing market is overvalued. For example, Zillow’s analysis found that homebuyers would need to earn 80% more than they did before the pandemic to comfortably buy a home.
Still, Gerli believes home affordability will continue to improve as long as the market continues to move it in a positive direction.
“Right now, housing affordability is so bad that it’s going to take years of price correction, years of lower mortgage rates and income growth,” Gerli said. “It’s going to take a while for that to happen.”
