Historically high interest rates and a tight housing supply have driven up home values nationwide, especially in some Southern states.
A new report by Fitch Ratings found that U.S. homes were, on average, overvalued by 11.1% at the end of last year. While this trend was present in roughly nine out of ten U.S. metro areas, Southern states experienced an even more pronounced increase, with Tennessee, Arkansas, South Carolina, Montana, and Alabama topping the list of the most overvalued homes in the country.
The phenomenon has been driven, in part, by a shortage of new builds. Home supply remains down over 34% compared to the pre-Covid period. The hurdle to build has only been made worse by the Fed’s aggressive tightening campaigning, which drove rates from 0.25% in March 2022 to over 5%.
While the average 30-year fixed mortgage rate fell to 7.02% as of May 16, a slight drop from the 7.09% witnessed the week prior, rates remain well above the levels seen in 2021 when they sat below 3%.
Fitch Ratings Director Sean Parker, author of the report, points out that the market is not acting in a typical fashion. Usually, higher rates cause downward pressure on housing prices. However, prices remain high despite the still elevated rates. Parker suggests this is simply a function of strong demand coupled with limited supply.
“Demand is high, but the supplies are limited, so that’s why the housing price is increasing,” said Parker, per Marketplace.
Higher rates have also discouraged existing homeowners from selling. In many cases, homeowners have locked down favorable mortgage rates, and by staying put, they avoid having to refinance at a higher rate.