Keeping “Price Correction” in Perspective

Nicholas Cappello

Not a crash; more like a distant ding.

Even in the headiest days of the home price run-up, no one in their heart of hearts ever believed that, for example, homes selling in Boise, ID were worth the 76% premium buyers were paying for them. So, when there’s chatter about a price correction, it’s critical to keep in mind the Tulip Mania that occurred in those secondary metro markets. That’s where the correction is expected to occur, and by the way it won’t even be that bad.

Here’s how the Chief Economist for Moody’s Analytics puts it:

“The worst price declines are projected to be close to double digits — near 10% peak to trough — in places like Phoenix, or Tampa. Although in the grand scheme of things, those also are markets where prices were up 30% this past year and 30% the previous year, so you’re only giving back a bit of what was gained over the past few years.”

The past few years have been very good for price appreciation across the board. With homeowners now sitting on record amounts of equity, a price correction — if it actually occurs — will likely amount to a modest check on overvaluation, and one that disproportionately affects regions where recent price growth was obviously unsustainable.

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