Home prices in the US could fall as much as 20% next year

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 rise and the housing market normalizes in the wake of the pandemic, according to a prominent Wall Street economist .

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a report last week that falling demand for housing. sharply rising mortgage interest rates weighs heavily on house prices.

“[W]e expects that house sales will continue to fall until early next year. At that point, sales will have fallen to the incompressible minimum level, where the only people moving home are those who have no choice due to work or family circumstances,”[ads1]; he said. “Discretionary buyers are quickly disappearing in the face of nearly 400 [basis point] increase in prices over the past year.”

Economists at Goldman Sachs said they expect home prices to fall by a more modest 5% to 10% next year.

Cities that saw the sharpest spikes in home prices 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 can further tighten supply

Mortgage interest rates have more than doubled this year. The average interest rate on a typical 30-year mortgage rose this week to 6.94%, from 6.92% last week and 3.2% in January. The average interest rate on 15-year fixed-rate loans is now 6.23%, compared with 2.33% a year ago.

Rising prices have forced some homeowners to put the brakes on selling their property because they would have to get a mortgage to buy another home as prices rise.

“It’s entirely possible that even people who want to trade down will face a larger monthly payment,” Shepherdson said. “That’s a good reason to stay, and thus limit the supply.”

The inventory of unsold existing homes fell for the second month in a row in September to 1.25 million, according to NAR data.

The supply of homes available for sale is likely to shrink next year, Shepherdson predicted, while noting that “prices will have to fall significantly to restore equilibrium.”

The median home sale price rose to $384,800 in September, up 8.4% from a year ago, the NAR said.

“We think inventory may increase modestly over the next month or two as homes stay on the market longer, but new listings continue to slow as sellers retreat to the sidelines,” said Nancy Vanden Houten, chief U.S. economist at Oxford Economics. in a research note.

How high will prices go?

Economists expect mortgage rates to continue rising next year as the Federal Reserve further pushes up borrowing costs in an effort to curb inflation. Rates could reach 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 believe mortgage rates could hit double digits.

Whalen Global Advisors said it expects rates to reach double digits by April 2023. Mortgage rates have not reached these levels since 1989, when they were 10.25%. The highest mortgage rate in US history was 16.64% in October 1981.

Mortgage rates have risen almost 3.8% since the end of 2021, according to Oxford Economics. Wall Street analysts expect the Fed hike to raise benchmark interest rates by up to an additional 1.5% by the end of the year.

“At the beginning of the year, it seemed highly unlikely that mortgage rates would push past 6%,” Lisa Sturtevant, chief economist for Bright MLS, told Realtor Magazine. “Now the question is how high will they go? Much of the answer depends on how aggressively the Federal Reserve is going to go about raising interest rates in its next two meetings.”