These 210 bubbly housing markets could crash 25% to 30%

You don’t need a Ph.D. in economics from the University of Chicago to understand that 7% mortgage rates are a threat to the U.S. housing market.

We’re already seeing it. On Tuesday, we learned that mortgage purchase applications fell 13% last week. That’s starkly sharper than the 1.1% decline we saw in the previous week. The difference? Last week’s 13% mortgage purchase application decline coincided with the first weekly 7% mortgage rate reading since 2002.

Sure, historically speaking, there’s nothing abnormal about 6% or 7% mortgage rates. But the numerical rate overlooks the impact of the ongoing mortgage rate shock: These rates, coupled with frothy home prices, put new monthly payments in the upper bounds of history. When accounting for income, it’s more expensive to buy now than it was at the height of the ’00s housing bubble.

This heightened affordability crunch already has economists and housing analysts alike downgrading their U.S. home price outlooks. Look no further than Moody’s Analytics.

In August, Moody’s Analytics expected U.S. home prices to fall between 0% to 5%. In September, Moody’s Analytics downgraded its outlook to a 5% to 10% national decline. But on Wednesday it once again slashed that forecast. Heading forward, Moody’s Analytics now expects a peak-to-trough U.S. home price decline of 10%.

“Affordability has evaporated and with it housing demand,” Mark Zandi, chief economist at Moody’s Analytics, tells Fortune. “Prices feel a lot less sticky [right now] than they have historically. It goes back to the fact they ran up so quickly [during the pandemic], and sellers are willing to cut their price here rapidly to try to close a deal.”

Here’s the thing: Moody’s Analytics baseline forecast assumes no recession. If a recession does manifest, Moody’s Analytics now expects a peak-to-trough U.S. home price decline between 15% to 20%. That’s not too far off from the 27% U.S. home price decline seen between 2006 and 2012.

View this interactive chart on Fortune.com

When a group like Moody’s Analytics says the “U.S. housing market” or “U.S. home prices,” they’re talking about an aggregated view of the country. Regionally, the results always vary. In the eyes of Moody’s Analytics, that’ll be particularly true heading forward.

In “significantly overvalued” housing markets, Moody’s Analytics now forecasts that home prices will fall between 15% to 20%. If a recession hits, Moody’s Analytics expects that U.S. home price decline to widen to between 25% to 30% in “significantly overvalued” housing markets.

These so-called “significantly overvalued” markets aren’t isolated to just a few parts of the country—they’re all over the place.

Each 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, 210 housing markets, including Boise (“overvalued” by 77%) and Las Vegas (“overvalued” by 60%), fell into that “significantly overvalued” camp.

View this interactive chart on Fortune.com

When a housing market enters into a downturn—a period of falling home sales and home construction levels—it’s usually frothy or bubbly housing markets that are at the highest risk of home price declines.

That explains why this ongoing housing downturn has so quickly triggered a home price correction: Things got very frothy during the Pandemic Housing Boom. The proof? Back in the second quarter of 2019, Moody’s Analytics only deemed three regional housing markets as “significantly overvalued.”

View this interactive chart on Fortune.com

Firms like Moody’s Analytics aren’t getting more bearish simply because mortgage rates touched 7%. Instead, they’re revising their outlooks because financial markets are signaling that 6% or 7% mortgage rates could be around for longer than expected. As long as mortgage rates remain that high, Zandi says it’ll apply immense downward pressure on these frothy home prices.

Over the next six months, Zandi expects mortgage rates to be around 6.5%. That’s up from his previous outlook of 5.5%.

What’s going on in the mortgage market? Well, a lot.

While the Federal Reserve doesn’t directly set long-term rates like mortgage rates, expectations for where the Fed will likely set future short-term rates (i.e. the Federal Funds rate) do impact how financial markets price mortgage rates. In recent months, financial markets have concluded the Fed is unlikely to back down on its inflation fight in the near term. That, of course, means higher short-term rates for longer. Cue upward pressure on long-term rates like mortgage rates.

But that only explains some of the jump in mortgage rates. There’s more at play.

In recent months, we’ve seen what Zandi calls an “extraordinarily wide difference between the mortgage and Treasury rates.” Historically speaking, the 10-year Treasury yield and mortgage rates move in sync. That’s broken right now—with mortgage rates trading four standard deviations above what Treasury yields would historically imply. Zandi says it boils down to prepayment risk. Investors believe 2022 mortgage borrowers will refinance to lower rates in the future. To adjust for that so-called prepayment risk, financial markets have applied upward pressure on mortgage rates.

View this interactive chart on Fortune.com

Let’s be clear: This home price correction started months ago. In parts of the country, the correction is already fairly steep.

What housing markets are shifting the fastest? We’re seeing the biggest correction in bubbly markets like Austin (where home values fell 7.4% between May and August), Boise (down 5.3%), and Phoenix (down 4.4%). Those markets all saw a flood of investor activity and WFH buyers during the pandemic. Those places also saw their home prices go far beyond what local incomes would historically support.

*”The Moody’s Analytics housing valuation measure is the percent difference between actual house prices and house prices historically consistent with wages and salaries per capita and construction costs. The price of a house is ultimately determined by the value of the land upon which it resides which is tied to the opportunity cost of the land as measured by wages and salaries, and the cost to build the home. Nationwide, approximately one-half of a home’s value is the land and the other half the structure, but this varies considerably across the country.  In San Francisco, for example, the land is far and away the biggest part of the home’s value, while in Des Moines, Iowa, it is the opposite. Our housing valuation measure accounts for these differences,” writes Moody’s Analytics chief economist Mark Zandi.

This story was originally featured on Fortune.com