Home Prices Are Falling. Various projections show a 5%–20% decline from the peak in property values. Home values have started to tumble from the dizzying heights they attained during the pandemic, but no one is certain how much further they will go.
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said in a research paper on Thursday that prices might decline by as much as 20% by next summer. Wells Fargo Securities economists estimate a 5.5% decline, while Goldman Sachs economists predict a price decline of between 5% and 10% from the peak. Sam Hall, a real estate expert at Capital Economics, projects an 8% decline in prices. If Shepherdson’s estimate of 20% is accurate, the decline would be marginally less severe than the early 2000s housing meltdown, when the market crashed and prices plunged 26% from their peak the peak they hit in early 2007.
The housing market has seen severe whiplash. The housing market was so competitive as recently as the summer of 2021 that prospective buyers were drafting personalized letters to sellers, appealing to their emotions in an effort to gain an advantage in bidding battles.
However, this year’s record-high mortgage rates have flipped the script on sellers. Higher borrowing costs have slowed down home sales, and property values have begun to decline. The S&P Dow Jones Case-Shiller Home Price Index reports that in July, average home prices decreased for the first time since 2012.
The National Association of Home Builders warned of an “affordability crisis” this week, calling the situation “unsustainable.” Jerome Powell, the head of the Federal Reserve, stated last month that the booming housing market was headed for a “difficult correction.”
This week’s housing market data showed further indications of a decline. For the eighth consecutive month, existing house sales decreased in September, according to the National Association of Realtors. According to the National Association of Homebuilders, homebuilder confidence fell to its lowest point in the same month since the beginning of the pandemic. Census Bureau statistics released on Wednesday revealed a steep decline in the number of homes that were beginning construction at that time. Additionally, according to information from the Mortgage Bankers Association and Freddie Mac, the average rate on 30-year fixed mortgages increased and reached 6.94%, its highest level since 2002. 67
According to Shepherdson, who commented on the interpretation of homebuilder confidence, “housing is in free-fall.” “So far, sales volumes have taken the heaviest damage,” but prices are now falling too, and they have a long way to go.”
Mortgage rates were a significant factor in both the price run-up during the pandemic and the present market cooling. The Federal Reserve stimulated the economy and reduced all types of borrowing costs when COVID-19 began to have an impact on the economy in March 2020 by lowering its benchmark fed funds rate to nearly zero and maintaining it there for two years. This decreased the yields on 10-year Treasury bonds, whose fluctuations are strongly correlated with the rates that mortgage borrowers must pay.
The average 30-year mortgage rate fell to an all-time low of 2.65% by January 2021, according to Freddie Mac’s calculations. With those low rates, newly minted telecommuters eager to find space to fit the new work-from-home lifestyle, and flush with cash from pandemic relief programs, demand for housing soared and money poured into the market, driving prices upward.
According to the Case-Shiller index, price growth peaked in March 2022, when average prices were 20.8% higher than the previous year. The housing market was a bubble, according to some analysts, and was about to implode.
Now, the reverse is taking place. In an effort to deter borrowing and spending, the Federal Reserve started hiking its benchmark interest rate in March. The action was taken in an effort to cool the overheating economy and control inflation, which has reached its highest level since the early 1980s. As a result, monthly payments for new mortgages have skyrocketed for buyers and mortgage rates have more than doubled since the year’s beginning.
The typical new mortgage payment now consumes 28% of the median buyer’s salary, according to Hall, a Global Economics economist. According to Hall in an email, that is greater than the NAR’s suggestion of no more than 25% of income and comparable to the levels before the housing busts in 2006 and 1989. Many prospective buyers have given up because to the prohibitive pricing, and there is little indication that they will do so very soon.
Hannah Jones, an economic research analyst for Realtor.com, wrote in an email, “We expect this pattern to continue as mortgage rates remain elevated and prohibit many buyers from joining or remaining in the market.” “Sellers will need to raise prices to the necessary level when house demand declines due to affordability to stoke demand.” According to data from Realtor.com, 19.5% of properties for sale received price decreases in December, up from 11% in September 2021.
According to Odeta Kushi, deputy chief economist of First American, “double-digit housing price increase was not sustainable in the long run, therefore what went up so quickly, must eventually come down.”
Correction Could Be Mil
There are reasons to think that instead of dropping dramatically, housing values will decline like a feather. One of the reasons is that there are not many houses for sale and there is still a high demand for housing. According to the NAR, there were just 1.3 million homes for sale in September, a significant decrease from the 1.8 million available in the same month in 2019.
Additionally, homeowners who locked in rates while they were low have good motivation to stay put given the high rates on new mortgages, Kushi said on Twitter, which is likely to prevent the supply of available properties for sale from growing.
The United States also faces a chronic housing shortage; as of 2021, the NAR anticipated that there were around 5.5 million less homes than were required. Economists predicted that this issue will prevent prices from falling too far. Wells Fargo economists see a “modest” drop in house prices, with prices remaining above average in 2021.
This is a totally different scenario from the early 2000s, when homebuilders had built too many homes and mortgage lenders had provided customers with weaker credit progressively riskier mortgages.
Since then, lending requirements have become more stringent, making typical homeowners much more financially secure than they were on the eve of the Great Recession, thereby reducing the likelihood of a large-scale real estate sell-off. Not to add, a wave of millennials who are about to enter their peak home-buying years will keep pushing up demand.
The housing bust of the mid-2000s won’t happen again, according to Kushi.
According to Jones, should the economy remain stable, “persistent demand and insufficient supply mean that the bottom is not likely to fall out of the housing market.” Prices will be under pressure to drop to a sustainable level as demand declines due to affordability, but this will be considerably different from the early 2000s as shifting demographics ensure sustained demand and stronger credit requirements mean reliable loans.”
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