Homes are overvalued in much of the U.S. — with these 5 states leading the list

The most overvalued housing market in America is in Memphis, Tenn., according to Fitch Ratings. - Getty Images/iStockphoto

Homes in 90% of major metropolitan areas in the U.S. are overvalued, with the sharpest increases recorded in Southern states, according to a new report.

The states with the biggest increase of homes being sold at prices over the long-term average were Tennessee, Arkansas and South Carolina, according to a report by Fitch Ratings, which looked at prices in the fourth quarter of 2023.

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Fitch said that homes were overvalued nationally by 11.1% at the end of 2023, which was little changed from the prior quarter.

The typical existing home in the U.S. was sold for a median price of $381,400 in December, according to the National Association of Realtors. The national average rent that month was $1,950, Fitch said, based on Zillow Z ZG data.

While a recent increase in the number of home listings in some markets is promising — suggesting that "the U.S. housing market is showing early signs of normalization" — Fitch noted that "the pace is being tempered by persistently high mortgage rates and the escalation of home prices."

The 30-year mortgage rate averaged 7.09% as of May 9. MarketWatch recently highlighted how some homes are selling for far over their asking prices with home-buying demand outpacing the number of properties on the market.

Here are the top five states where homes were most overvalued, according to Fitch Ratings, with home-price data obtained from Redfin:

State

Annual change in home prices

Median sales price in March 2024

Tennessee

6.2%

$378,600

Arkansas

5.9%

$248,900

South Carolina

9.4%

$370,100

Montana

3.8%

$535,000

Alabama

4.3%

$272,700

Most overvalued metro areas in the U.S.

Fitch ranked the 50 most populous metropolitan areas in the U.S. by how much they were deemed to be overvalued.

Among the 50 most populated metro areas, home prices were most overvalued in Memphis, Tenn.; Buffalo-Cheektowaga-Niagara Falls in New York; and Indianapolis-Carmel-Anderson in Indiana, Fitch said.

Home prices were higher than the long-term averages in those areas due to high demand as well as a rise in rents, Fitch noted.

Here's the top five:

Metro area

Annual change in home prices

Median sales price in March 2024

Memphis, Tenn.

-1.3%

$172,000

Buffalo-Cheektowaga-Niagara Falls, N.Y.

4.5%

$177,500

Indianapolis-Carmel-Anderson, Ind.

6.2%

$240,000

Milwaukee-Waukesha-West Allis, Wis.

5.9%

$185,000

Nashville-Davidson-Murfreesboro-Franklin, Tenn.

1.1%

$474,990

To be sure, home prices in Memphis were down 1.3% from a year earlier based on Fitch's analysis, but home valuations had still risen over the previous five years. The median sale price of a home in the metro area was $172,000 in March 2024, according to data from Redfin RDFN.

And the current environment of high rates and high prices is here to stay, at least for the time being, Fitch added. High mortgage rates and bidding wars make homeownership unaffordable for many Americans; home buyers today would need to earn more than $100,000 a year to afford monthly housing costs on a median-priced home.

With the Federal Reserve not likely to cut interest rates in the immediate term, "the exceptionally low [mortgage] rates of the pandemic [are] now a thing of the past," Fitch said. As a result, "consumers are recalibrating their housing-market expectations to align with the new norm of higher mortgage rates and home prices."

To that end, home-price growth could slow down from 5.5% in 2023 to 3% or even 0% in 2024, the company said, which would be the slowest pace of growth since 2019.