- Significant price declines lie ahead, many experts argue.
- Insider recently spoke with three experts calling for median home prices to fall.
- Recession fears and rising interest rates have started to cool interest in the U.S. housing market.
- Poor consumer sentiment implies home prices may decline this year and next.
One of the most remarkable developments in the post-pandemic economy has been the sharp rise of the housing market. Despite initial pandemic fears, people with means rushed into the real estate sector in 2020, inherently driving up home prices. The Federal Reserve also dramatically reduced benchmark interest rates, spurring acquisitiveness.
But what the Fed giveth, it taketh away. When the central bank started shifting its policy toward hawkishness, the housing market began to absorb the move. Recognizing that the window to participate in the red-hot real estate sector could be closing soon, home listings spiked in May.
In theory, housing prices should continue declining throughout this year — and perhaps into 2023. For one, higher borrowing costs significantly impede affordability. Second, mortgage lenders will likely not approve as many applicants as the economy slows down (and possibly risks a recession), thus contributing to layoffs in the lending segment. Finally, home sellers are clearly seeing the writing on the wall. That’s driving competition as homeowners look to secure deals amid the declining environment.
The housing market is starting to cool off in a big way thanks to skyrocketing mortgage rates this year.
Homebuilder sentiment is at its second-lowest level in 37 years thanks to tanking demand — existing home sales were down 14% in June, year-over-year.
Rising mortgage rates are no doubt one of the biggest factors impacting the housing market right now.
But it’s important to remind your clients that the low rates of the last few years were an anomaly.
As inflation rises and mortgage rates climb, many may see their purchasing power shrink and their dream of homeownership fade. This also impacts our sellers who see their home values decrease (At least from the peak highs)
However, it’s important to remember one big piece of economic wisdom: there is no better hedge against inflation than homeownership. Historically, we have seen homeownership outperform inflation in most decades. So, if there’s an asset to invest in, housing is one of the few tangible assets that tends to hold its value.
All of this equates to coming price declines according to a growing chorus of economists and industry experts.
Recently, Insider profiled the views of three experts calling for median home price drops ahead.
1) Michael Cook, an investment analyst at Penn Mutual Asset Management, told Insider that he thinks prices trend back toward their levels before the pandemic began, especially in some of the hottest markets in the county including Seattle and the surrounding metro area.
"The U.S. housing market is due for a reset, given the extraordinary home price growth seen since the onset of the pandemic," Cook said.
2) José Torres, a senior economist at Interactive Brokers, said he thinks supply and demand dynamics in the market are moving in such a way that creates a perfect recipe for home price declines.
"A perfect storm is brewing in the real estate market due to near decade high construction levels and plummeting demand," Torres said.
3) Desmond Lachman, senior fellow at the American Enterprise Institute and a former deputy director at the International Monetary Fund, broke down for Insider why prices will drop 15-20% as buyer demand gets crushed by rising interest rates and a still-hawkish Fed.
'The damage is likely to have already been done': A former IMF official says that substantial home price declines are coming in the US housing market as demand-crushing dynamics continue to put buyers on the sidelines”
Home Prices Must Reflect Realities
“Real estate will continue to transition away from sellers and favoring more buyers as we progress through mid- to late 2022, with a significant increase in the number of homes that hit the market.”
Bankrate Chief Financial Analyst Greg McBride also says that “We will still see home price levels that are 15 to 20 percent above what a home would’ve sold for six to 12 months ago.” In other words, the housing market could have more value to give up.
Capital Economics supports this notion. It forecasts that — because of mortgage rates rising above a key affordability threshold — annual house price growth “will fall to -15% by mid-2023, followed by a gradual recovery to 3% by end-2024.”
By the end of 2022, experts anticipate that the 30-year fixed mortgage rate could land between 5.8% and 7.0 percent. For the 15-year fixed mortgage rate, their predictions fall between 3.9% and 6.0 percent.
When will rates stop rising?
“The outlook is for mortgage rates to rise even further in the next couple of years. However, as inflation will start slowing down, mortgage rates won’t rise as fast as they have been rising.”
SHOULD I sell my HOME RIGHT NOW? Should I buy
This is probably one of the biggest questions agents are getting asked right now, and it’s never been more important to have a good answer for it.
For all the reasons we mentioned above, the short answer to this question is YES.
- Prices are going to drop 15 to 20% by January 2023.
- Prices will then go flat for 6 months with 7 to 8% rates.
- Factor in “Normal” 5% appreciation and it take 3 years to get back to today’s prices.
- That’s 4 years from not to get back to where we are baring nothing goes wrong.
- Increasing rates will counteract price drops
- Marry the home. Date the rate
- Home ownership is the #1 hedge against inflation
- Home ownership is the greatest way to build wealth in America (past, present and future) period