Homes in 91% of the country's housing market remain overvalued despite a recent uptick in home sales and an increase in inventory, according to a new report.
Home prices across the country were 11.1% overvalued as of the third quarter of 2023, a trend that extended to 91% of metro areas, Fitch Ratings wrote in a new report published March 1. Given that prices kept rising into the fourth quarter, Fitch expects the overvaluation to have extended through the end of last year.
"There are signs of a gradual thawing in the U.S. housing market, as indicated by slight improvements in new home sales and inventory," the ratings agency said in the report. "Challenges such as high mortgage rates and elevated home prices, which aggravate the affordability issue, continue to moderate the pace of this normalization."
Fitch noted that its overvaluation estimate was driven by the acceleration of real home prices. Home prices remained overvalued in 91% of the country's metro areas, with 58% of these areas seeing houses overvalued by 10% or more.
The top three overvalued metro areas in the country are Winston-Salem, North Carolina; Memphis, Tennessee-Mississippi-Arizona; and McAllen-Edinburg-Mission, Texas, Fitch wrote.
Rising Home Prices Means Buyers Need To Earn More
In this environment, it means aspiring homebuyers would need to earn about $47,000 or 80% more that they did before the COVID-19 pandemic to comfortably afford a house, Zillow recently found. Homeownership is considered affordable if a buyer does not need to spend more than 30% of their pre-tax income on housing costs, including mortgage payments.
"Home shoppers today need to make more than $106,000 to comfortably afford a home. That is 80% more than in January 2020, showing how the math has changed for hopeful buyers, who are more often partnering with friends and family or "house hacking" their way to homeownership," the report said.
Having said that, wages have failed to keep up with the rising costs. In 2020, the median income was about $66,000. It has only grown 23$ ever since to $81,000. This means the average home buyer would take about 8.5 years to save enough for a 10% down payment.
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