House prices have plunged in the second half of 2022 with demand for residential real estate cooling in a number of cities across the United States, prices could continue to fall by as much as 20% next year as mortgage rates climb and the housing market normalizes to the aftermath of the pandemic, according to a reputable Wall Street economist.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a report last week that the fall in housing demand amid mortgage rates up sharply weighs heavily on housing prices.
“[W]We expect home sales to continue to fall until early next year. At this point, sales will have fallen to the incompressible minimum level, where the only people moving are those who have no choice due to work or family circumstances,” he said. “Discretionary buyers are rapidly disappearing in the face of the nearly 400 [basis point] increase in rates over the past year.
Goldman Sachs economists said they expect house prices will drop 5% to 10% next year.
Cities that saw the biggest home price increases last year are now seeing them come back to earth, including places like Austin, Texas; Phoenix, Arizona; Salt Lake City, Utah; and Denver, Colorado.
Home sales fell to 4.7 million last month, down 1.5% from August, according to the National Association of Realtors.
Rising interest rates could further tighten supply
Mortgage rates have more than doubled this year. The average rate for a typical 30-year mortgage rose this week to 6.94%, from 6.92% last week and 3.2% in January. The average 15-year fixed rate mortgage rate is now 6.23%, compared to 2.33% a year ago.
Rising rates have forced some homeowners to put the brakes on selling their property because they would need to get a mortgage to buy another home as rates rise.
“It’s entirely possible that even people who want to trade will face a larger monthly payment,” Shepherdson said. “That’s a good reason to stay put, thereby limiting supply.”
The inventory of unsold existing homes fell for the second consecutive month in September to 1.25 million, according to NAR data.
The supply of homes available for sale will likely shrink next year, predicted Shepherdson, while noting that “prices need to come down significantly to restore balance.”
The median sale price of a home rose to $384,800 in September, up 8.4% from a year ago, according to the NAR said.
“We believe inventory may rise slightly over the next two months as homes stay on the market longer, but new listings continue to decline as sellers pull back to the sidelines,” said Nancy Vanden Houten, chief US economist at Oxford Economics, in a statement. search note.
How high will the rates go?
Economists expect mortgage rates to continue to climb next year as the Federal Reserve raises borrowing costs further in a bid to rein in inflation. Rates could hit 8.5% “which would be another big shock to the housing market,” NAR chief economist Lawrence Yun told a group of real estate investors last week. Other analysts think mortgage rates could reach double digits.
Whalen Global Advisors said it expects rates to hit double digits by April 2023. Mortgage rates haven’t hit those levels since 1989, when they were 10.25% . The highest mortgage rate in US history was 16.64% in October 1981.
Mortgage rates have climbed almost 3.8% since the end of 2021, according to Oxford Economics. Wall Street analysts expect the Fed to raise its benchmark interest rate by up to another 1.5% by the end of the year.
“At the start of the year, it looked very unlikely for mortgage rates to go above 6%,” said Lisa Sturtevant, chief economist for Bright MLS, Told Realtor Magazine. “Now the question is how far will they go? Much of the answer hinges on how aggressive the Federal Reserve is in its rate hikes in its next two meetings.”