Rising mortgage rates have led to a significant increase in the number of overvalued markets in the U.S., according to First American Financial’s July Real House Price Index (RHPI). 

An overvalued market is one where the median existing-home sale price exceeded house-buying power.

Fifteen markets are now considered overvalued, up from just four a year ago. And while more moderation is expected, annual house-price declines are not.

The report found that while mortgage rates will continue to drift higher in the coming months, the rapid increase in rates seen in recent months is likely to be behind us. Overvalued markets will need to adjust to those higher mortgage rates, while “housing market fundamentals still support a moderation of annualized house-price appreciation rather than a sharp decline,” according to the report.

Mark Fleming, chief economist at First American, says housing affordability continued its rapid annual decline in July as nominal home prices increased 16.7% from last year, and the 30-year fixed mortgage rate increased 2.5% compared to last year.

Real house prices increased 53.8% year over year, reflecting a decline in affordability, which left few options for home buyers to mitigate higher mortgage rates and price increases, according to Fleming. Those options include increasing household income or choosing an adjustable rate mortgage, which typically has a lower rate than a 30-year fixed rate mortgage.

“As affordability wanes, would-be buyers are pulling back from the market, prompting annual house-price appreciation to moderate,” he said. “Annual house-price growth peaked in March at nearly 21% but has since decelerated to a still-high 16.7% in July.” 

Fleming added that as the slowdown continues, the pace of home price moderation will vary by market.