The housing market is close to a rare buying opportunity with prices set to drop in pandemic boom towns, analyst says

Homes in some pandemic boom towns are as much as 30% overvalued, one real estate analyst estimates.

• A steep home-price decline is coming for popular pandemic markets, according to Reventure CEO Nick Gerli.
• Gerli thinks the Southern real estate market is in a bubble on the verge of bursting.
• Some boom towns have a huge amount of inventory set to hit the market, which could weigh on prices, he said.

Prospective homebuyers may be better off staying on the sidelines: the housing market is on its way to a rare buying opportunity, with steep home price declines bound for key areas of the real-estate market in the coming years, according to one analyst.

Nick Gerli, the CEO of the real estate analytics firm Reventure, thinks the home prices in the South are bound for a double-digit decline over the next few years. That's because the region boomed during the pandemic, but is now seeing waning demand and a deluge of housing inventory about to come online, Gerli told Business Insider.

He thinks a 20% price decline in the region over the next few years is reasonable, with as much of a 15% price decline potentially occurring over the next 12 months.

That alone won't be enough to make the housing market more affordable, but it could put home buyers on the path to a good opportunity in a few years' time, assuming that price declines continue, mortgage rates keep falling, and incomes in the South keep rising, he said.

"I'm not anticipating that home buyers will look at that and be like, 'I'm going to rush in and buy,'" Gerli said. "If someone's expecting an overnight crash where everything gets cheaper to the level they want it, that's unrealistic. But if someone has patience and does their due diligence, in two to three years, there will be a lot of good buying opportunities."

Bursting the bubble

Moments of opportunity for buyers are rare in the current market, with the majority of prospective homeowners held back by high interest rates and low inventory.

Those factors have resulted in one of the most unaffordable housing environments the US has seen in decades. Home prices climbed to a record $419,300 in May, according to the National Association of Realtors. Borrowing costs also remain elevated, with the 30-year fixed mortgage rate easing slightly to 6.89% last week, per Freddie Mac data.

But things are different in Southern boom towns, Gerli said, as those areas are coming off the end of a pandemic-fueled construction frenzy. New housing inventory in the South has climbed to around 299,000 as of July, the highest level ever recorded, Gerli said, citing US Census data.

But demand in the region is now starting to sag. Home sales have stagnated in key states like Florida, Redfin data shows, with the state losing its luster as a boomer retirement haven.

Yet, new homes are still being added to the market. Builders in the South have nearly 8.9 months of fresh housing supply in the works. That's not far from the peak recorded in 2008, when Southern homebuilders had around 10.8 months of supply on their lots, a Reventure analysis of Census data shows.

The result could be a steep supply-demand imbalance in the region, pushing prices lower, Gerli predicted.

"Demand for new homes, it's way down, way down from the pandemic. And that's now intersecting with the biggest pipeline of homes for sale in the South that we've seen ever. That's an additional ingredient on the top, which just makes it more likely that prices fall," Gerli told BI.

The situation in the South's housing market also bears some similarities to previous housing bubbles, Gerli noted. In key boom towns, home prices have shot up 50%-70% since the pandemic, though incomes have only risen 10%-20%, he said, citing municipal data.

That makes Sun Belt states around 30% overvalued, he estimated — a bubble that could easily be popped by the sharp rise in inventory coming online.

The US economy also remains on uncertain footing. If the economy enters a recession or unemployment rises past 7%, homebuyer demand could be dented enough to set the double-digit price decline in motion, Gerli predicted.

"The economic cycle tends to follow the housing cycle," he added. "The unemployment rate has gone up significantly. Interest rates are at the most restrictive level in two decades. I think at some point there's going to be a recession, who knows when it's going to happen, but obviously if and when it does, it's not going to be good for the housing market."

Home prices have already begun dropping in key metros in the South. In particular, Florida and Texas contain seven of the 10 cities in the US seeing the largest number of price declines, Redfin said in a recent report.

It'll take a long time for housing to become more affordable overall, given how overvalued the market is, Gerli said. Homebuyers, for instance, now need to earn 80% more than they did before the pandemic to comfortably afford a home, according to a Zillow analysis.

Still, Gerli believes affordability will continue to improve as long as the market continues to see its affordability levers move in a positive direction.

"The affordability is so bad right now, we're going to need multiple years of price corrections, multiple years of mortgage rate reductions and income growth," Gerli said. "It's just going to take some time for that to play out."