The run-up in housing prices over the past two years has been extraordinary. The pattern has started to look like 2005 and 2006, when one of the most dangerous housing bubbles began. That turned into a catastrophe in 2008. The coming drop in home prices almost certainly not be that severe. However, it is coming.

Today, the housing market faces two hurdles to more price increases. Mortgage rates have approached 5% recently. That is up 3% from a year ago. Home prices, on the other hand, have kept rising. Between the two factors, home affordability has eroded substantially. A rush to buy a home before mortgage rates rise more also has lifted home prices.

As was the case in 2008, not all markets will suffer equal declines, or perhaps any at all. The markets hit the worst are those where demand for homes has pushed prices up by 40% or more. Boise is among the best examples of this.

An analysis of Boise home prices by Norada pointed out that “While appreciation had slowed for the majority of the previous year, last month saw an unprecedented increase in median home prices. Boise saw a $25,000 increase, the first time in history that prices changed that dramatically in less than a month.”

Other markets with characteristics like Boise, particularly as it related to demand, are Austin, Nashville and Tampa.

People who are looking for homes in larger markets also face difficulty. Home prices in places like Los Angeles and New York are two to three times the national median. Without annual incomes well above the national median of between $65,000 and $70,000, these houses are not affordable.

Perhaps in places where prices are very low, like Detroit and Cleveland, home prices will remain stable, but they are the exception and not the rule.

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