I don't think HCOL or VHCOL areas will suddenly become priced like Indianapolis or Memphis. They will remain on the extreme edge of affordability for whomever can obtain a job in those areas.
That said, the extreme edge of affordability changes a lot when interest rates change. 30 year mortgage rates have risen from a low of 2.65% on January 7, 2021 to 5.3% as of last week.
https://fred.stlouisfed.org/series/MORTGAGE30US/To put that change in context, the monthly P&I payment on a house increased by 37.8% between those times
due to interest rate changes alone.
https://www.calculator.net/mortgage-calculator.htmlAdd on the double-digit price increases, bidding wars, and all-cash offers seen over the past 17 months, and you paint a picture that looks a hell of a lot like a FOMO-driven bubble. Housing costs cannot continue to outpace wage gains forever. As
@waltworks points out, affordability in at least some VHCOL areas is worse than it was in 2007.
As economist Herbert Stein noted, "if something cannot go on forever, then it will stop" and perhaps that is what
@waltworks is observing in real time. At some point, consumers have to bail and move to lower-cost areas, because otherwise their money will literally run out. Hence the well-publicized exodus of Californians and their companies to lower-cost, unrestricted-construction places like Texas. Also, at some point, a recession will hit and the unemployment rate will no longer be 3.6%. What happens when people with huge mortgages lose their jobs and can't find another one? We've seen this movie before.
Almost nobody thinks housing could suffer a major collapse, but I do. I watched the 2007 bubble lead to a collapse of 23% that didn't recover for nine years, with VHCOL and HCOL areas doing worse than that (in LCOL markets, prices were flat through the "crisis", so it was the more expensive areas driving the decline in the national mean). We've seen an even steeper deviation from the home price trendline since 2021, suggesting another 2007-2009 crash could easily happen.
https://fred.stlouisfed.org/series/USSTHPIHow many of those potential homebuyers with $100k in their checking accounts will catch that falling knife when their stock investments have been decimated, they're watching other people lose hundreds of thousands of dollars on housing overnight, and their $150k jobs are suddenly in jeopardy?
These observations lead me to be wary of banks, home builders, and REITs right now. And if I owned property in a HCOL area right now, I'd be auctioning it to the last of the FOMOers.