This week, we learned that slumped home construction subtracted 1.37 percentage points from U.S. GDP in the third quarter. That’s the biggest housing contraction since 2007. Meanwhile, mortgage purchase applications are down 41.8% on a year-over-year basis. Total mortgage purchase applications are now lower than any point hit during the Great Recession.
This downshift in housing activity has sharpened in recent weeks as the U.S. housing market adjusts to another mortgage rate surge. As of Friday, the average 30-year fixed mortgage rate sat at 7.08%. Prior to October, the U.S. had not seen a 7-handle mortgage rate since 2002.
The combination of an intensified housing market downturn coupled with 7% mortgage rates is also translating into more downward revisions in home price outlooks. Look no further than Moody’s Analytics, which now predicts U.S. home prices will fall 10% between peak-to-trough.
“I raised my mortgage rate forecast and thus lowered my outlook for home sales, homebuilding, and home prices. I was expecting mortgage rates to average 5.5% through next year’s spring selling season. Now, I think it is much more likely to be closer to 6.5%. That hurts demand and homebuilding and home prices,” Mark Zandi, chief economist at Moody’s Analytics, tells Fortune.
When a group like Moody’s Analytics says “U.S. home prices,” they’re talking about a national aggregate. On a regional basis, Moody’s forecast model predicts the home price correction will vary dramatically.
Let’s take a look at Moody’s revised regional forecast.
In total, Moody’s Analytics analyzed 322 regional housing markets. Of those, the firm predicts 100% will see a peak-to-trough home price decline.
Among those markets, Moody’s Analytics expects 196 markets to see a home price decline greater than 10%. That includes markets like Morristown, TN (-26% forecasted decline); Muskegon, MI (-25.5%); Pocatello, ID (-23.4%); Boise, ID (-23.3%); and Flagstaff, AZ (-21.6%).
Reversely, Moody’s Analytics expects the smallest declines to come in Montgomery, AL (-1.4% forecasted decline); Erie, PA (-2.3%); Trenton-Princeton, NJ (-2.7%); Gainesville, FL (-3.1%), and Baltimore-Columbia-Towson, MD (-3.2%).
While Zandi expects the housing activity decline to bottom out in the coming months, the home price correction—which started this summer—could take years to play out.
Historically speaking, home prices are sticky as sellers hold out until a supply glut forces them to lower their prices. This time around, however, things are less sticky.
“Sellers are willing to sell. They realize they’re not getting ‘the price I could have gotten a few months ago, but it’s still much higher than I could’ve gotten three years ago.’ So, they feel like they’re doing OK. Even with these price declines, they’re still up a lot from where they bought the home originally,” Zandi tells Fortune.
Simply put: Home prices might be less sticky this time around because home prices went up so high, so fast.
Every quarter, Moody’s Analytics assesses whether local fundamentals, including local income levels, can support local house prices. If a regional housing market is “overvalued” by more than 25%, Moody’s Analytics deems it “significantly overvalued.” Through the second quarter of the year, half of the nation’s housing markets, including Boise (“overvalued” by 77%), fell into that “significantly overvalued” camp.
Since this spring, Zandi has told Fortune that these “bubbly” or “frothy” markets would be the most at risk of significant home price corrections. Spiked mortgage rates coupled with sky-high home prices have simply pushed new payments beyond what many would-be borrowers can afford.
The ongoing home price correction, Zandi says, should help to bring these stretched fundamentals back into line.
“Before [home] prices began to decline, we were overvalued [nationally] by around 25%. Now, this means [home] prices will normalize. Affordability will be restored. The [housing] market won’t be overvalued after this process is over,” Zandi says. “It’s all about affordability. First-time buyers are locked out of the market, they simply can’t afford mortgage payments. Trade-up buyers won’t sell and buy because it doesn’t make any economic sense.”
This forecast by Moody’s Analytics assumes the U.S. does not slip into a recession. If the unemployment rate were to go above 6%, Zandi predicts home price declines would be much greater than his firm currently forecasts. Indeed, if a recession does manifest, Zandi says the peak-to-trough U.S. home price decline would likely be between 15% to 20%. In “significantly overvalued” housing markets, Zandi says, that decline would likely be between 25% to 30%.
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This story originally Appeared on Fortune