Key Takeaways
- Our assessment of U.S. home price overvaluation rose roughly two percentage points to 16.6% as of second-quarter 2024.
- HPA gains outpaced income growth and overvaluation remains high nationwide, with 92% of MSAs still overvalued.
- The credit impact on U.S. RMBS continues to depend on the geographic distribution of the mortgage pools and the valuation dates of the properties backing the loans in those pools.
S&P Global Ratings has updated its U.S. home price overvaluation assessment and the related Federal Housing Finance Agency Home Price Index (FHFA HPI) inputs based on second-quarter 2024 data. Our assessment rose to 16.6% as per capita income growth lagged home price appreciation (HPA), compared with our last assessment, which, based on fourth-quarter 2023 data, indicated an overvaluation of 14.3% at the national level (see "U.S. Home Price Overvaluation Softens As Wage Growth Outpaces Home Price Gains," published April 15, 2024). The nonseasonally adjusted All-Transactions FHFA HPI increased 3.70% between fourth-quarter 2023 and second-quarter 2024, while the Purchase-Only Index increased 4.24% on an unadjusted basis. However, regional variation persists and our assessment shows that about 92% of metropolitan statistical areas or divisions (which we refer to collectively as MSAs) are overvalued, up slightly from our prior assessment of 89%.
We believe the credit impact that home price overvaluation could have on U.S. residential mortgage-backed securities (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's or a state's) 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 Oct. 11, 2024, we updated our over/undervaluation measures and the related FHFA HPI inputs using second-quarter 2024 data. We use these values because they relate to certain U.S. 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 2023 and second-quarter 2024.
Overvaluation Increases
Our current nationwide overvaluation assessment rose roughly two percentage points to 16.6% due to HPA gains outpacing income growth. The second-quarter FHFA HPI increased 2.6% at the national level relative to the prior quarter, with all states experiencing HPA (see chart 1). The national FHFA HPI has historically increased 1.58% on average in the second quarter.
Chart 1
Housing Is Still Overvalued
As with our prior review, overvaluation remains high nationwide, with 92% of MSAs still overvalued. There is still substantial regional variation in both the number of overvalued MSAs and the extent of the overvaluation. For instance, numerous Florida MSAs (such as those in and around the Tampa area) are overvalued by more than 35%, while certain MSAs (including several in Northern California) remain undervalued by as much as 15% (see chart 2). However, relative to our prior assessment, which is based on fourth-quarter 2023 data, the degree of over/undervaluation softened for the top 10 overvalued and undervalued MSAs. The average overvaluation of the top 10 overvalued MSAs decreased to 40.1% from 42.5%, while the average undervaluation of the top 10 undervalued MSAs was 8.1% (compared with the prior reading of 12.8%).
We believe U.S. home prices will continue to depend on a combination of factors, including the trajectory of the anticipated decline in the 30-year fixed mortgage rate, local housing market dynamics, and economic fundamentals. The Purchase-Only Index increased 0.1% month over month in July 2024 after remaining flat in May and June and rising 0.6% on average in April, March, and February 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 16.6% national average. The top 10 overvalued MSAs have representation from four states: Florida (five), Texas (three), Idaho (one), and Tennessee (one). Chart 4 shows the 10 most overvalued and undervalued MSAs, and the over/undervaluation distribution for all 399 U.S. MSAs
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 "Methodology And Assumptions For Rating U.S. RMBS Issued 2009 And Later" criteria 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 16.6% 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 8% (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: | Adam J Odland, Englewood + 1 (303) 721 4664; adam.odland@spglobal.com |
| Sujoy Saha, New York + 1 (212) 438 3902; sujoy.saha@spglobal.com | |
| Katelyn Huang, New York; katelyn.huang@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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