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In May 2022, Moody’s Analytics chief economist Mark Zandi told me that the pandemic housing boom was over, and the housing market was entering into a “correction.” At that time, Zandi expected national home price growth to flatline, while particularly inflated markets such as Boise and Austin would experience peak-to-trough declines of 5% to 10%. But as mortgage rates kept spiking in 2022, Zandi downgraded that call to a 5% to 10% peak-to-trough national decline, and declines of 15% to 20% in “significantly overvalued” housing markets like Austin and Boise.

The rationale behind this prediction stemmed from the fact that home prices across many markets had become disconnected from underlying factors like local incomes. House prices in some markets were getting frothy at the end of the pandemic housing boom. In the second quarter of 2022, Moody’s Analytics estimated that the U.S. housing market was “overvalued” by 27%, surpassing even the peak “overvaluation” of the housing bubble era, which stood at 22.1% in Q4 2005, and significantly higher than the 2.2% “overvaluation” observed in Q2 2018.

While home prices haven’t pulled back as much as Zandi expected, the U.S. housing market from a fundamental perspective is healing a little. In Q4 2023, the U.S. housing market was “overvalued” by 13.9%. While that’s still above pre-pandemic levels, it’s well below the peak “overvaluation” in Q2 2022 (27%).

Click here to view a searchable chart with data for each of the 403 metro housing markets. (Use the dropdown menu to chose an individual metro area.)

Why is the U.S. housing market becoming less “overvalued” despite the fact that U.S. home prices haven’t fallen sharply?

The reason boils down to the fact that national home price growth has decelerated significantly since the boom. Over the 18 months from June 2022 to December 2023, U.S. home prices increased 0.8%, according to the Case-Shiller National Home Price Index. That’s compared to the 31.5% jump in national home prices in the prior 18 months (December 2020 to June 2022).

That decelerated growth of national home prices coupled with sustained income growth has given the fundamentals some reprieve.

Click here to see the full size version of the left map (Moody’s overvaluation study for Q2 2022) and the right map (Moody’s overvaluation study for Q4 2023).

Among the 403 largest markets tracked by Moody’s Analytics, 22 in Q4 2023 were deemed “undervalued,” including markets like Chicago and San Francisco, while 381 markets were considered “overvalued” (including 155 markets falling into the category of “significantly overvalued,” indicating an “overvaluation” of over 25%).

That’s down from Q2 2022, when 395 of the 403 metro area housing markets were considered “overvalued” (including 205 in the “significantly overvalued” camp).

Some markets like Austin (which was 61% “overvalued” in Q2 2022) and Boise (which was 70.2% “overvalued” in Q2 2022) have seen bigger adjustments given that home prices in those markets have fallen double-digits since the spring 2022 peak. According to Moody’s Analytics latest reading, Austin and Boise homes were “overvalued” by 36.9% and 47.8%, respectively, in Q4 2023.

It’s important to understand that an “overvalued” housing market doesn’t necessarily imply that home prices will decline. Historically, such markets can sustain their “overvaluation” for extended periods, and corrections often occur through rising incomes rather than falling home prices. An “overvalued” market signifies that prices in that area are higher than historically expected, considering factors such as income levels.