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Respected analyst predicts 'overvalued' San Francisco Bay Area home prices may drop

A respected analyst is issuing a warning for the San Francisco Bay Area: Homes are overvalued, especially in this cooling real estate market.


Mark Zandi, the chief economist at the venerated firm Moody’s Analytics, told Fortune in a report published Wednesday that the San Francisco Bay Area housing market is overpriced, albeit not to the degree of rapidly growing housing markets elsewhere in the country.

Moody's “assesses whether local economic fundamentals, including local income levels,” are sustainable relative to the cost of local housing.

The San Francisco-Oakland-Berkeley area — lumped together by Moody’s Analytics — has home prices that are overvalued by 11.4%, according to data by Moody's Analytics. Other parts of what's broadly considered the Bay Area, excluding Vallejo (where homes are overvalued by nearly 20%), see smaller or comparable percentages. Outside the Bay Area, particularly in areas that have had an influx of residents, home values are reportedly inflated. In the Santa Cruz-Watsonville area, homes are overvalued by nearly 36%. And in Reno, prices are 39% higher than expected. That’s not to mention Boise, Idaho, and Austin, Texas, which have seen overvaluations of 72% and 61%, respectively. (In Boise, Fortune notes, housing prices have already been cut.)

These "overvaluation" numbers don’t necessarily mean that prices will decline, Fortune explains. But when housing markets are no longer booming, as has been the case in 2022 so far, local housing markets with wildly inflated home values (over 25%) do typically experience significant price drops. Now, what does that mean for the Bay Area, where overvaluation is less severe? It remains to be seen for certain, but already, price reductions for active home listings in San Francisco are up nearly 200%, according to Compass. And a Redfin report in July suggested that the Bay Area housing market is cooling faster than anywhere else in the country.

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