Key Takeaways
- Our assessment of U.S. home price overvaluation nudged up a percentage point to 15.6% as of third-quarter 2023.
- Home prices were resilient and outpaced wage growth, and 89% of MSAs are 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 third-quarter 2023 data. Our assessment nudged up a bit but is still comparable to our last assessment of roughly 15%, which was based on first-quarter 2023 data (see "U.S. Home Price Overvaluation Continues To Ease But Remains High," published Aug. 7, 2023). Home price overvaluation increased marginally at the national level in third-quarter 2023 as per capita income growth lagged home price appreciation. The non-seasonally adjusted All-Transactions FHFA HPI rose an impressive 1.85% between second- and third-quarter 2023, while the Purchase-Only Index increased 1.46% on an unadjusted basis. Regional variation persists, however, and this assessment shows that about 89% of metropolitan statistical areas or divisions (which we refer to collectively as MSAs) are overvalued. Under our prior assessment, roughly 85% were overvalued.
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 Feb. 2, 2024, we updated our over/undervaluation measures and the related FHFA HPI inputs using third-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 higher at the national level, given the FHFA HPI change between second-quarter 2023 and third-quarter 2023.
Overvaluation Inches Up
Our current nationwide overvaluation assessment increased a percentage point to 15.6%, predominately a result of the HPA gain. The third-quarter price gain of 1.85% exceeded the 40-year average for the third quarter of 1.23%, primarily due to the lack of existing home inventory that is supporting price growth. Only two states experienced home price depreciation in third-quarter 2023, down from approximately a third of states in first-quarter 2023 (see chart 1).
Chart 1
Housing Is Still Overvalued
Overvaluation remains high nationwide, with 89% of MSAs still overvalued, up from 85% as of our August 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 29% and 31%, respectively (see chart 2).
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 October and November 2023 on a 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 15.6% national average. The top 10 MSAs have strong representation from two states: Florida (six) and Texas (two). These regions have experienced relatively high population growth, which has contributed to the increase in home prices as demand has outpaced supply. For more on population dynamics, see "2024 U.S. Residential Mortgage And Housing Outlook: A Rate And Supply Story", published Jan. 17, 2024. 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 the 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 15.6% 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 |
| Samuel Williams, Englewood +1 3037214226; samuel.williams@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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