Key Takeaways
- Our assessment of U.S. home price overvaluation fell three percentage points to 14.6% as of first-quarter 2023.
- Overvaluation eased but remains high nationwide, with 85% of MSAs still overvalued, though with a fair degree of regional variation.
- The credit impact on U.S. RMBS will depend on the mortgage pools' geographic distribution and the valuation dates of the underlying properties backing the loans in those pools.
S&P Global Ratings has updated its home price overvaluation assessment and the related Federal Housing Finance Agency Home Price Index (FHFA HPI) inputs, based on first-quarter 2023 data. We lowered our assessment to roughly 15% from approximately 17% as of our last review, which was based on fourth-quarter 2022 data (see "U.S. Home Price Overvaluation Eased As Prices Cooled," published May 1, 2023). Home price overvaluation eased slightly at the national level in first-quarter 2023 as per capita income growth outpaced home price appreciation. The non-seasonally-adjusted All-Transactions FHFA HPI rose 0.3% between fourth-quarter 2022 and first-quarter 2023, while the Purchase-Only Index increased 0.7% on a non-seasonally-adjusted basis. However, despite regional variation and the still high (about 85%) proportion of overvalued metropolitan statistical areas or divisions (which we broadly refer to as MSAs), MSAs are generally less overvalued compared to our prior assessment.
We believe the credit impact that home price overvaluation could have on U.S. RMBS will depend on the geographic distribution of the mortgage pools and the valuation dates of the underlying properties backing the loans in those pools.
Measuring Over/Undervaluation
We view home prices as overvalued or undervalued based on how much a specified region's (e.g., an MSA or a state) price-to-income (PTI) ratio is above or below its long-term average. Our regional inputs are the FHFA HPI and income per capita data (from the Bureau of Economic Analysis and the U.S. Census Bureau), which we use to compare the current PTI ratio to the 20-year average and assess over/undervaluation.
Overvaluation depends on a transaction's pool diversification and the location of the underlying mortgaged properties. Our loss severity assumptions will tend to be higher when properties are overvalued because a greater correction in home prices could occur under adverse scenarios. On Aug. 4, 2023, we updated our over/undervaluation measures and the related FHFA HPI inputs using first-quarter 2023 data. We use these values because they relate to certain U.S. residential mortgage-backed securities (RMBS) in our loan evaluation and estimate of loss system (LEVELS) model, which provides loan- and pool-level calculations of default likelihood (foreclosure frequency), loss given default (loss severity), and loss coverage (see "LEVELS Model For U.S. Residential Mortgage Loans," published Aug. 5, 2019). Depending on when a property valuation was performed, our indexed valuation will be slightly higher at the national level, given the FHFA HPI change between fourth-quarter 2022 and first-quarter 2023.
Overvaluation Continues To Ease
Our current nationwide overvaluation assessment decreased three percentage points to 14.6%, supporting our thesis that overvaluation may have already peaked in this housing cycle. About a third of states experienced home price depreciation in first-quarter 2023, down from approximately two-thirds in third- and fourth-quarter 2022 (see chart 1).
Chart 1
Housing Is Still Overvalued
Overvaluation remains high nationwide. Our assessment shows that 85% of MSAs are still overvalued, despite the decline from 93% as of our May 2023 review. There is still substantial regional variation in terms of both the number of overvalued MSAs and the extent of the overvaluation. For instance, the Austin, Texas and Phoenix, Arizona MSAs remain overvalued (by about 39% and 33%, respectively) despite the respective five and seven percentage point declines in overvaluation since our May review (see chart 2). These two MSAs also posted FHFA HPI declines of one and two percent, respectively, for the fourth-quarter 2022 to first-quarter 2023 period.
We believe U.S. home prices will continue to depend on a combination of factors, including the trajectory and stability of the 30-year fixed-rate mortgage, local housing market dynamics, and economic fundamentals. The Purchase-Only Index rose month-over-month in May and April 2023 on both a seasonally and a non-seasonally-adjusted basis. Chart 3 shows the regional differences in home price changes.
Chart 2
Chart 3
The Most Overvalued And Undervalued MSAs
Many MSAs have overvaluations that are still much higher than the 15% national average. The top 10 are in three states: Florida (six), Texas (three), and Idaho (one). Boise, Idaho, the 11th most overvalued MSA, saw overvaluation decrease to 41% as of first-quarter 2023 from the 73% peak reached in second-quarter 2022. Chart 4 shows the 10 most overvalued and undervalued MSAs, and the over/undervaluation distribution for all 399 MSAs in the U.S.
Chart 4
The Impact On RMBS
We believe the credit impact of FHFA HPI changes and overvaluation levels on U.S. RMBS will depend on the geographic distribution of the mortgage pools and the valuation dates of the properties backing the loans in those pools.
Our over/undervaluation measure provides information about affordability in terms of the deviation from a long-term average, which could influence how much property prices decline under some economic scenarios. To account for this when rating certain U.S. RMBS, we calculate the loss severity on a loan by applying our over/undervaluation assessment to our market value decline (MVD) assumptions (see our criteria, "Methodology And Assumptions For Rating U.S. RMBS Issued 2009 And Later," published Feb. 22, 2018). Under a 'AAA' rating stress, we assume that (for a given region) 50% of the overvaluation amount of a mortgaged property will factor into the MVD, with a corresponding value of 20% at a 'B' rating level. At the national level (assuming a 14.6% overvaluation), our 'AAA' MVD assumption is approximately 53%. This assumes that, under a 'AAA' rating stress, the additional decline in a property's value would reduce the liquidation proceeds by approximately 7% (compared to a market at equilibrium) and, correspondingly, increase the loss severity assumed for a given loan.
When indexing property values, we apply 50% of the cumulative upward movements and 100% of the downward movements, based on our criteria. The slightly higher property values that result from this indexation could decrease the probability of defaults and have varying effects on loss severities, depending on loan age and regional over/undervaluation.
This report does not constitute a rating action.
| Primary Credit Analyst: | Jeremy Schneider, New York + 1 (212) 438 5230; jeremy.schneider@spglobal.com |
| Secondary Contacts: | Sujoy Saha, New York + 1 (212) 438 3902; sujoy.saha@spglobal.com |
| Kalpesh S Ghule, Englewood + 1 (303) 721 4157; kalpesh.ghule@spglobal.com | |
| Research Contacts: | Tom Schopflocher, New York + 1 (212) 438 6722; tom.schopflocher@spglobal.com |
| Kohlton Dannenberg, Englewood + 1 (720) 654 3080; kohlton.dannenberg@spglobal.com |
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