US home prices are now “clearly falling” and could plummet by as much as 20% by mid-2023 as the Fed continues its aggressive push to hike interest rates, according to a prominent economist.
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said his firm’s estimates suggest home prices have already declined by about 5% from their May peak.
His projections showed seasonally adjusted existing-home sale prices sank by 0.7% in August and have now declined for three straight months.
“The very low level of inventory means that a headlong collapse in prices is unlikely, but we still expect a total decline of up to 20% by the middle of next year,” Shepherdson said in a note to clients.
“Housing, in short, is in recession, and everything connected to housing either is in recession now or soon will be,” Shepherdson added.
Long-term mortgage rates have jumped by more than 3% since January and have eclipsed 6% for the first time since the Great Recession of 2008. The higher rates have forced many prospective homebuyers to the sidelines until conditions improve.
Existing-home sales fell for the seventh straight month in August to a seasonally adjusted annual rate of 4.80 million, according to data from the National Association of Realtors. Sales were down by 0.4% compared to July and a whopping 20% compared to one year ago.
The NAR’s data showed the median existing-home price was $389,500 in August, down from an all-time high of $413,800 reached in June.
Shepherdson argued the market shouldn’t “be deceived” by the relatively minor downtick, which “does not mean that the floor has been reached.”
“Sales lag mortgage applications, which continue to fall, pointing to further significant declines,” Shepherdson added.
Shepherdson acknowledged the housing market was not struggling to the extent of its implosion during the Great Recession, though current conditions are also “not good.”
The Pantheon economist has regularly adopted a bearish stance on the housing market. Earlier this week, he asserted US housing was in the midst of a “deep recession” after data showed declining homebuilder confidence.
The housing market is expected to stay under pressure as the Federal Reserve implements more interest rate hikes. Fed Chair Jerome Powell addressed conditions on Wednesday after central bank officials enacted a third straight 0.75% increase.
Powell argued the current “difficult correction should put the housing market back into better balance.”
“The deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals and that’s a good thing,” Powell said.