Something big is happening in bubbly housing markets

Even before the lockdowns were eased, white-collar professionals who saw their jobs go remote were ditching their apartments in places like Seattle and New York City for homes in markets like Austin, Boise, and Las Vegas. That rush of homebuyer activity, of course, saw home prices absolutely skyrocket in those markets. In Las Vegas alone, the Pandemic Housing Boom pushed home prices up 49%.

That boom is over now.

Across the country, housing markets are cooling down. Home sales are falling. Multiple offers are drying up. Homebuilders are scaling back and offering buyer incentives. But every aspect of the cooldown is more intense in markets like Boise and Austin. Simply put: Pandemic boomtowns are getting hit the hardest by the Pandemic Housing Slump.

"You could make a strong case that in a lot of housing markets the last 10% of home price appreciation was purely aspirational and irrational, and that'll come off the top really fast…That’s exactly what we’re all seeing right now," Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune.

This looming home price correction, Palacios says, will be the most pronounced in frothy markets like Boise and Las Vegas. In fact, he says Boise could be the first major market to post a year-over-year home price decline. That could even occur before the end of 2022.

Inventory is arguably the best indicator for how fast a market is shifting. If active inventory gets too high, it increases the chances a market could experience a home price correction. That’s why Fortune pulled Realtor.com inventory data for Austin, Boise, and Las Vegas. We wanted to see if they're actually inching toward a correction.

View this interactive chart on Fortune.com

In July 2020, Fortune called Austin the No. 1 housing market in the country to invest in real estate during the pandemic. Our theory was that Austin was poised to boom. We were right.

Amid the pandemic, Austin saw a flood of new residents. That includes individuals like comedian Joe Rogan, venture capitalist Keith Rabois, and Tesla CEO Elon Musk, while companies including Tesla and Oracle also moved to town. It all culminated in a historic housing boom.

Spiked mortgage rates in 2022, of course, have flipped the script. In July, Austin inventory sat at 7,794 homes—compared to 3,063 homes for sale during the same month in 2021. On a year-over-year basis, that’s a 154% jump.

While homebuilders across the country have brought back incentives to help entice buyers, many builders in Austin have already turned to home price cuts. If the market continues to slow, existing homes could soon also see price cuts.

View this interactive chart on Fortune.com

Nationally, U.S. inventory in July was 44% below where it was in July 2019. That's not the case in Boise. In July, Boise inventory was 141% above July 2021 levels, and 34% above July 2019 levels.

The swift inventory spike explains why there's no shortage of national research firms predicting that home prices are about to fall in Boise. That includes both John Burns Real Estate Consulting and Moody's Analytics. One reason? There's a glut of new construction in Boise that will soon hit the market. If buyers aren't found, those homes could put downward pressure on Boise home prices.

"We’re seeing [Boise] builders pull back across the board. Unlike 2008, many aren’t being caught as off guard this time. They have more cash. They’re making concessions and moving inventory," says Mac Wrigley, a senior operations manager at Boise-based Sekady Capital.

Wrigley, who up until June was a director of operations at a Boise homebuilder, remains hopeful that local builders can off-load a lot of this inventory before it becomes an issue.

"If the market can slow new permits, and absorb the backlog of completions finishing now through spring, there is optimism the market will normalize. We’re still under-supplied, but also still have an affordability problem for local buyers," Wrigley says.

View this interactive chart on Fortune.com

Back in the early 2000s, housing speculators piled into the U.S. housing market. Those investors, who were often home flippers, targeted fast-growing Sunbelt cities like Las Vegas. That speculation ultimately worked against Las Vegas once the housing bubble popped in 2008. See, as the housing cycle "rolled over," those investors were the first to run for the exits. That pile-up of inventory, of course, only put further downward pressure on the market.

Fast-forward to today, and Las Vegas is once again at the center of a cooling housing market: On a year-over-year basis, inventory in Las Vegas is up 83%. Not only is Las Vegas slowing fast, it's slowing historically fast. In fact, its 2022 cooldown is swifter than the cooldown most bubbly markets notched in the lead-up to the 2008 crash.

But don't pencil in another 2008-style Las Vegas housing crash. At least that's according to Moody's Analytics. The firm predicts house prices in Las Vegas are poised to fall 4% between the fourth quarter of 2022 and the fourth quarter of 2024. While some might classify that as a housing correction, it's hardly a crash.

View this interactive chart on Fortune.com

Let's be clear: Not every U.S. housing market is shifting as fast as Boise or Las Vegas. While spiked mortgage rates hit evenly across the country, the Pandemic Housing Slump has not.

Look no further than Virginia Beach. On a year-over-year basis, inventory in Virginia Beach is down 7%. That's hardly a swift correction.

View this interactive chart on Fortune.com

Why are housing markets in Austin, Boise, and Las Vegas getting hit so hard by the housing cooldown? It's likely a result of detached underlying economic fundamentals.

The Pandemic Housing Boom has pushed home prices in markets like Austin and Boise far beyond what local incomes would historically support. According to Moody's Analytics, Boise and Austin are "overvalued" by 72% and 61%, respectively. Meanwhile, Virginia Beach is "overvalued" by just 19%.

Simply being overvalued relative to underlying economic fundamentals doesn't guarantee a home price correction. But it does matter. Historically speaking, when a housing cycle "rolls over" it's normally the significantly "overvalued" housing markets that are at the highest risk of home price corrections. The inventory spikes in markets like Las Vegas suggest that may once again hold true.

"In some markets, house prices rose over 40% in just two years. At some point, affordability becomes an issue. Wages have not kept up with the higher overall costs of living, and there is a ceiling to the higher monthly mortgage payments that even low-interest rates could not appease," David Phelps, founder of Freedom Founders, where he coaches people on how to build wealth through passive real estate investments.

"In general, those markets that reported higher levels of price appreciation will be those that demonstrate greater price contraction."

Want to stay updated on the U.S. housing market? Follow me on Twitter at @NewsLambert.

This story was originally featured on Fortune.com