KC Fed, Report: Home Prices Are Overvalued but Will Decline Only Gradually

“The surge in home prices that followed the onset of the COVID-19 pandemic and the sharp increase in interest rates during 2022 have driven up the cost of purchasing a home. Although purchase demand has contracted and sales of single-family homes have plummeted, home prices have declined only modestly, leading many prospective homeowners to question whether relief is on the way.”

“Over the longer term, the current unaffordability and high valuation of home prices are likely to prove unsustainable. But much of the return to affordability is likely to come from rising nominal wages and an eventual decline in mortgage rates rather than a large decline in nominal home prices. Similarly, much of the return to a more sustainable valuation is likely to come from rising nominal rents and an eventual decline in mortgage rates.”