Long Island housing market is overvalued, but it's worse elsewhere, Moody's says

Long Island home prices have become untethered from their long-term fundamental values, according to an analysis released this week by Moody’s Analytics. The report found that home prices in all of more than 400 U.S. metro areas it examined are overvalued relative to long-term trends.

Long Island homes were overvalued by 16.4% in the second quarter, the analysis found. That was below the national average of 26%, which was a record high since Moody's began tracking it more than 30 years ago. 

Long Island was more overvalued than the average for the broader New York metro area of 10%. No metro area in the country was considered undervalued.

The analysis is based on a comparison of Moody’s Analytics Home Price Index to an area’s fundamental home value, or the level of home prices Moody's would expect given long-term trends in appreciation  and income data for the region. Moody’s considers prices that exceed their fundamental value by more than 20% as extremely overvalued. Boise, Idaho (76.9%), Nashville, Tennessee (63.1%) and Austin, Texas (61.1%) were the most overvalued.

Among 106 metro areas with populations of 750,000 or more, Long Island was the 83rd-most overvalued.

“The theory is that prices over the long term should follow income growth trends,” said Cris deRitis, deputy chief economist at Moody’s Analytics. “They can be faster or slower in different periods. Over a long horizon, they should move together.”

But just because home prices are higher than would be expected, doesn’t mean Moody’s expects those prices to immediately return to their fundamental value, he said.

In Nassau County, the median sale price in July was $720,000, which was 32.1% higher than in July 2019 before the pandemic started. Suffolk set a record median sale price of $575,000 last month, which was 38.6% higher than in July 2019, according to OneKey MLS.

DeRitis said the report shouldn’t be cause for worry for Long Island homeowners, particularly those who aren’t planning to sell anytime soon. “It’s a wakeup call in terms of resetting some expectations,” deRitis said. “You shouldn’t expect that type of rapid house price growth.”

For homeowners who plan to be in their homes for a long time, the adjustment in value “shouldn’t have much effect at all,” deRitis said, especially for those who locked in interest rates at historic lows.

Homebuyers looking to buy a starter home and then upgrade within a few years or flip investment properties for a profit should be more cautious, he said. “That could be a more risky proposition.”

Moody’s expects U.S. home prices to decrease 1% to 2% on average in the third quarter of 2023 compared with the same period this year. By the third quarter of 2024, Moody’s expects prices to decrease 4% to 5% compared with the third quarter this year, according to Mark Zandi, chief economist at Moody’s Analytics.

Of course, a drop in the U.S. average could mean some areas see prices rise, while other areas see them fall.

The shift in the market has been driven by a swift jump in mortgage rates that has made it more expensive to buy a home. The average 30-year fixed mortgage rate was 5.66% for the week ending Thursday, according to mortgage giant Freddie Mac. A year ago, it was just 2.87%. The average peaked in June at 5.81%, which was the highest it has been since November 2008.

“The increase in mortgage rates is coming at a particularly vulnerable time for the housing market as sellers are recalibrating their pricing due to lower purchase demand, likely resulting in continued price growth deceleration,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

Higher rates have reduced buying power, the amount homebuyers can afford to offer while still qualifying for a mortgage, said Meg Smith, an associate broker with Daniel Gale Sotheby’s International Realty in Bay Shore. That has eliminated some first-time homebuyers from the market. 

“We’re not getting the volume of offers on a property but we are still getting offers very quickly,” Smith said. “There are still bidding wars, so if a house is priced on the money, it’s still going very quickly.”

Even as some buyers drop out of the market, there are still not enough houses available. There were 7,238 houses for sale on Long Island at the end of July, according to OneKey MLS. Before the pandemic there were almost double the number of listings.

Margaret Burkett, a real estate agent with Douglas Elliman in Locust Valley, said that while she’s noticed the market slowing, she still believes it’s a seller’s market.

“The overriding theme is supply and demand. The low inventory has been going on for 10 years, and then COVID just made it explode,” Burkett said. “There’s nothing on the horizon that is going to change and create a lot of inventory. There’s just too many people who need homes and there aren’t enough.”

The Moody’s analysis compares the relationship between home prices and income in specific regions. When Moody’s says a region is extremely overvalued, it means that the ratio between home price growth and income growth is well above the norm for that region. That’s why a metro area such as San Jose, California, which has some of the highest home prices in the United States, can still be considered the least overvalued in the country. Income growth there has been in line with home prices.

One caveat, deRitis said, is that the pandemic has caused a wave of migration and the high incomes of new arrivals might not be reflected in a region’s income data.

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.