Written by Lance Lambert

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Fed Chair Jerome Powell has made it clear: We aren't watching the U.S. housing market normalize, we're watching it "reset" through a "difficult correction."

"For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level and at a reasonable pace and that people can afford houses again. We probably in the housing market have to go through a correction to get back to that place," Powell told reporters last week.

Essentially, the current housing correction is pushing the U.S. housing market—which had soared based on a historically cheap 3% mortgage rates—toward a new equilibrium in the face of higher mortgage rates. Inventory levels will continue to rise, and home sales will continue to fall—likely depressing home prices.

But it isn't a one-size-fits-all housing correction. Despite mortgage rates have jumped evenly across the country, the reset in home prices varies significantly by market. In some regional housing markets, the Pandemic Housing Boom as fizzled out. Others look like they're moving straight from the Pandemic Housing Boom into the Pandemic Housing Bust.

To better understand how the housing correction varies nationwide, let's look at inventory data. Reading inventory data is pretty straight-forward: If inventory levels are spiking it means it's quickly moving from a sellers' market and into a buyers' market.

As the housing market began to shift this summer, inventories finally spiked. Nationally, inventory levels jumped 53% between March and August.

While inventory levels are rising, they're still well below pre-pandemic levels: Nationally, the number of active listings in August 2022 was 41.5% below August 2019. That has some housing bulls thinking that home prices won't fall. After all, historically speaking, there's a stickiness to home prices. Sellers don't like to discount heavily until the economics force them to start cutting prices. That "economic force" is usually a supply glut.

But here's the thing: Tight inventory levels aren't stopping home price declines. In July, U.S. home prices posted their first month-over-month decline since 2012.

"Our view is that you will see—and we’re seeing it right now—home prices will fall even though supply levels are not ripping higher,” says Rick Palacios Jr., head of research at John Burns Real Estate Consulting.

How can home prices fall even though there's neither a supply glut nor a flood of distressed sellers? It boils down to pressurized affordability. The combination of higher mortgage rates— 6.82% as of Thursday—and frothy home prices have pushed new monthly mortgage payments far past what many buyers can financially stomach. Cue falling home prices.

On one hand, tight inventory levels aren't stopping home price declines. On the other hand, the markets with the biggest inventory spikes earlier this summer now have the sharpest home price declines. Simply put: We still need to be pay close attention to inventory shifts.

Markets with substantial inventory spikes—over 150%—fall into one of two camps.

The first group are high-cost tech hubs. Look no further than San Francisco (where inventory is up 378%) and San Jose (up 177%). The reason for their sharp correction is simple: Not only are their high-end real estate markets more rate-sensitive, but so are their tech sectors.

The second—and biggest—group are bubbly housing markets. Being "overvalued" relative to underlying economic fundamentals doesn't guarantee that home prices will fall. That said, in a housing downturn, it's usually significantly "overvalued" housing markets that are at the highest risk of sharp corrections. We're seeing that now: Over the past five months, inventory levels have spiked in bubbly markets like Boise (where inventory is up 298%), Austin (up 435%), Phoenix (up 317%), and Las Vegas (up 192%).

Not only are bubbly markets—like Boise, Las Vegas, and Phoenix—shifting fast, they also look like early-inning housing busts. Let's take a closer look.

Even before pandemic stay-at-home orders were lifted, white-collar professionals living in cities like San Francisco and Seattle in 2020 were already taking off for Mountain West getaways. The poster child being Boise. Its outdoorsy lifestyle, tech scene, and relative affordability (at least for Californians) made it the go-to for work-from-home techies.

That wasn't welcomed by all the locals. Some folks with California license plates even found printed cards on their windshields that read: "GO BACK TO CALIFORNIA WE DON’T WANT YOU HERE." It's easy to see why some locals were frustrated: The Pandemic Housing Boom—during which Boise home values soared more than 50%—priced many Boise locals out of buying homes. According to Moody's Analytics, Boise is actually the nation's most "overvalued" major housing market—with home prices trading 72% higher than underlying fundamentals would normally support.

Fast forward to September, and that Boise boom is long gone. This summer, Boise inventory skyrocketed 297% while home values dropped 5.3%. That correction is far from over. Industry insiders tell Fortune there's a glut of new construction in Boise that will soon hit the market. If buyers aren't found, those homes could see home prices fall even further.

There's no doubt about it: Opendoor—a national iBuyer of homes—is taking some hefty losses on some of its recent "flips." The epicenter of those losses could be Las Vegas.

An example is this North Las Vegas home that Opendoor bought for $540,800 in May. Just weeks later, Opendoor put the home on the market for $581,000. However, it obviously didn't get many bites. As of Thursday, the list price was down to just $490,000. That's 10.4% below what Opendoor paid for the home this spring.

Las Vegas continues to shift fast—historically fast. Between March and August, Las Vegas inventory spiked 192%. While Las Vegas home values—which are lagged—are already down 3% from their 2022 peak.

Back in the early 2000s, home flippers targeted fast-growing Sunbelt cities like Phoenix. That speculation ultimately worked against Phoenix 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 pileup of inventory, of course, only put further downward pressure on Phoenix.

Fast-forward to today, and Phoenix is once again at the center of a cooling housing market: Between March and August, Phoenix inventory was up 317%. That's already translating into a sharp home price decline. According to Zillow, Phoenix home values are down 4.4% from their 2022 peak.

Moody's Analytics chief economist Mark Zandi expects home prices in significantly "overvalued" housing markets like Boise, Phoenix, and Las Vegas to fall 10% to 15% between peak-to-trough. But that assumes no recession. If an economic downturn hits the nation, Zandi says prices markets like Boise, Las Vegas, and Phoenix could decline 20% to 25%.

Let's be clear: Not every U.S. housing market is shifting like Boise, Phoenix, and Las Vegas.

In the Greater New York metro, spiked mortgage rates certainly impacted the market, however, inventory on a year-over-year basis is still down. And according to Zillow, Greater New York home values only fell 0.2% between May and August.

The reason? Unlike bubbly markets in the South and West, New York isn't as detached from underlying fundamentals. According to Moody's Analytics, Las Vegas and Phoenix are "overvalued" by 53.3% and 53.8%, respectively. While Greater New York is "overvalued" by just 7.4%.

Simply put: The ongoing housing correction is teaching us that housing fundamentals still matter.