MW Home prices are overinflated in many parts of the U.S. Are we in a housing bubble?

By Aarthi Swaminathan

Over half of homeowners have seen their home values fall since last year, the highest share in 13 years, Zillow says

Housing bubbles happen when home prices shoot up due to high demand and speculation.

Many housing markets in the U.S. are way overvalued, but don't mistake the current environment for a housing bubble, economists say.

Home prices are rising to new heights. In September, the median sales price of an existing home rose to $415,200, the highest figure for that month, according to the National Association of Realtors, since the group began tracking the data.

Yet home sales have largely remained depressed. High interest rates impede home buying and home construction, a persistent lock-in effect has resulted in homeowners clinging to their 3% mortgage rates instead of selling, and sellers would rather delist their home than drop their asking price.

Against this backdrop, is the housing market in a bubble? And if it is, when will the bubble pop?

Housing bubbles happen when home prices shoot up due to high demand and speculation. When the bubble pops, demand falls sharply and supply increases, which then causes a big drop in prices. Homeowners see negative equity in their homes as they owe more on their mortgage than the actual value of their home. They may also potentially face foreclosure.

But don't panic: There isn't really a housing bubble, economists tell MarketWatch.

"Do I think the party's over? Yes," Ken Johnson, a professor of finance and real estate at the University of Mississippi, told MarketWatch. "I just don't think we're going to have a crash."

Housing is also hyperlocal, meaning that even though some markets may be overvalued, others may be seeing sharp price declines due to specific conditions such as a high number of listings.

"It's really hard with housing to make generalized statements," Richard Moody, chief economist at Regions Financial Corp., told MarketWatch. "It wasn't too long [ago] when the big discussion was about when housing was in a recession. Now it's about if housing is in a bubble."

From the archives (March 2025): Prospective home buyers are hoping for a recession to bring down housing prices. Does that make sense?

Homes are overvalued in the Midwest and Northeast

Homes are indeed overvalued in some parts of the country.

In many big metropolitan areas in the Midwest and Northeast, prices are far higher than long-term pricing projections would suggest, according to Johnson.

Consider the disconnect in Detroit: The actual average home price in the city was $262,145 at the end of September, according to the Beracha and Johnson Housing Ranking Index, which Johnson co-developed. But based on long-term pricing trends, the statistical model indicates that the expected average home price in Detroit would be $196,360.

That 33.5% gap between the estimates based on pricing trends and actual average prices makes Detroit the most overvalued market among the largest metropolitan areas in the U.S.

The next most overvalued markets are Cleveland; New Haven, Conn.; Akron, Ohio; and Worcester, Mass. - all cities in the Midwest or the Northeast.

Despite the overvaluation of homes in these areas, Johnson does not consider them to be in a housing bubble. Rather than plummeting, "prices are going to flatten out and stop going up so rapidly, but kind of hold where they are," he said.

Home values are falling for more than half of U.S. households

On the other hand, home values are falling across half of the country.

The real-estate platform Zillow (Z) has its own algorithm that creates a so-called Zestimate, or an estimate of a home's value. Around 53% of all Zestimates across the U.S. have declined since last year, the highest share since 2012, the company said.

A year ago, only 14% of Zestimates had declined year over year, said Treh Manhertz, a senior economic researcher at the platform, meaning that the jump is pretty significant.

But home values are not in a free fall. The average drop in current Zestimates from their peak is about 10%. In 2012, the average drawdown was 27%.

Even with the year-over-year drop in value, most estimated home values have gone up substantially since the homeowners purchased the property. Losses are uncommon, with just over 4% of homes losing value since they were last sold, Manhertz's research found.

While 53% of homeowners are seeing a lower Zestimate for their home this year as compared with 2024, the value is still up substantially since they bought the home.

Within the largest 50 metropolitan areas in America, homeowners in Austin, Texas, saw the biggest drop in estimated home values, followed by those in San Antonio and Dallas. In Austin, nearly two in 10 homeowners have a lower Zestimate than when their home was last sold, Zillow said. In San Antonio, about 13% of homes are valued below their last sale price.

"Homeowners may feel anxiety when they see their Zestimate drop, but for most, these are paper losses, not real ones," Manhertz said.

If the homeowners sold at this point, they would likely incur a loss, but over the last five years, only 3.6% of homes in Austin have lost value - indicating that people who have held on to their homes for longer are doing fine.

"Home values surged nationwide over the past six years, and the vast majority of homeowners still have significant equity," Manhertz said. "What we're seeing now is a normalization, not a crash."

Zestimates are only one way to derive the value of a home and can be lower or higher than what a home actually sells for. Zillow says its median error rate for listings is about 1.83%, while off-market homes have an error rate of 7.01%.

Other ways to estimate a home's value include an appraisal and an analysis of comparable homes that have sold recently in the area.

Home prices are already falling, but they need to fall even more to ease affordability constraints

Homeowners, meanwhile, are already seeing what is likely their biggest asset lose value.

The S&P Cotality Case-Shiller index, which tracks home prices across the country, showed last week that annual price growth in August had slowed to the weakest pace in over two years.

"For the fourth straight month, home values have lost ground to inflation, meaning homeowners are seeing their real wealth decline even as nominal prices inch higher," Nicholas Godec, head of fixed-income tradables and commodities at S&P, said in a statement.

One key reason sellers have little incentive to sell is that unlike during the 2007-09 recession, they are not losing their homes to foreclosure, said Glenn Kelman, chief executive of Redfin $(RKT)$. They are also being deterred because buying a new home would mean moving up to a much higher mortgage rate.

That lock-in effect is keeping home prices stable - for now.

"Most of the inventory is still people with a 3% mortgage. So even if they want to move, they feel trapped in that house," Kelman said.

But Kelman also framed the lock-in effect as a detriment to societal progress.

"America's really stuck, and that is something new in our history," he said. "We've been characterized by this incredibly dynamic society, people willing to move where the opportunities are ... and that is still true, as the younger generation is still renting. But the older generation [of homeowners] is really stuck."

Looking ahead, aspiring home buyers who want to enter the market can expect slower price increases - and even price declines in some areas, though at a limited scale.

For housing to become more affordable, either home prices or mortgage rates have to come down, Moody said, or "you start to see really rapid income growth ... [which] looks unlikely."

Some buyers might be hoping for a crash to bring down prices, but they should be careful what they wish for, Johnson, the finance professor, said.

"A significant crash right now would solve our affordability problem overnight," he said. "But it would also cost billions of dollars in wealth to the typical American ... if their home values crash. We don't want that."

Do you have questions about the housing market that you would like to see covered in MarketWatch? We want to hear from readers. You can write to us at readerstories@marketwatch.com. A reporter may be in touch to learn more. MarketWatch will not attribute your answers to you by name without your permission.

-Aarthi Swaminathan

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November 07, 2025 13:49 ET (18:49 GMT)

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