The US housing market is facing a potential 19.5% correction, according to Dallas Federal Reserve economists.[0] The economists warn that further rate hikes from the Federal Reserve could make a crash even worse, as the housing market remains vulnerable to global economic spillover effects.
The US housing market experienced a “pandemic boom” in 2020, leading to a rapid deterioration in affordability. Goldman Sachs projects that home prices will fall 6.1% in 2023 as rates continue to tick higher.[1] This is in comparison to the 26% peak-to-trough home price crash seen between 2007 and 2012.[2]
According to economists from the Dallas Federal Reserve, home prices in the United States would need to decrease by 19.5% in order to bring the country in line with its housing fundamentals.[2] This could be triggered by tighter-than-expected monetary policy.
The Fed’s actions continue to affect the housing market, with mortgage rates going from 3.78% in 2017 to 4.94% in 2018.[3] The panel expects mortgage rates to trend downward after the first quarter, with 63% predicting that rates for 30-year fixed loans will be highest in Q1 of 2023.[4]
Goldman Sachs analysts anticipate major decreases in house prices in four US cities by the end of 2021, which experienced housing booms during the COVID-19 pandemic.[5] Austin, Seattle, Phoenix and San Francisco will all experience double-digit price declines as an increase of available homes surpasses demand.[6]
Dallas Fed economists argue that if the observed price-to-rent ratio grows at an explosive rate relative to its fundamental-based ratio estimated with long-term interest rate and rent growth data, then it’s worth considering whether the sector is in a bubble.[7]
Homeowners who secured lower mortgage rates during the recent Pandemic Housing Boom (or previous years, due to the long-term low rates) are preferring to remain in their homes, rather than selling and having to acquire a loan with rates nearing the 7.37% peak. Most of these homeowners have rates of 3% or less.[5] This, combined with the Fed’s actions, is making it difficult for potential buyers to take action, particularly for repeat buyers with existing mortgages with rates less than half of current rates.[8]
In conclusion, the US housing market is facing a potential 19.5% correction and further rate hikes from the central bank could make a crash even worse.
0. “The Fed’s own economists are warning of a 19.5% housing correction” Business Insider, 1 Mar. 2023, https://www.businessinsider.com/fed-economists-markets-investing-housing-correction-crash-economy-rate-hikes-2023-2
1. “US home prices could tumble nearly 20% and Fed economists warn further rate hikes risk an even worse housing c” Business Insider India, 28 Feb. 2023, https://www.businessinsider.in/stock-market/news/us-home-prices-could-tumble-nearly-20-and-fed-economists-warn-further-rate-hikes-risk-an-even-worse-housing-correction-the-bubble-hypothesis-merits-attention/articleshow/98316432.cms
2. “Dallas Fed: Housing market is only passing through a modest correction, but ‘tighter than expected’ monetary policy …” Yahoo Life, 2 Mar. 2023, https://www.yahoo.com/lifestyle/dallas-fed-housing-market-only-101346689.html
3. “Everybody Wants the Answer to This Question” Scotsman Guide News, 1 Mar. 2023, https://www.scotsmanguide.com/residential/everybody-wants-the-answer-to-this-question/
4. “Expert panel expects home prices will grow at a steady pace starting in 2024 – Zillow Gr (NASDAQ:Z), Zill” Benzinga, 2 Mar. 2023, https://www.benzinga.com/pressreleases/23/03/n31165856/expert-panel-expects-home-prices-will-grow-at-a-steady-pace-starting-in-2024
5. “‘I can’t afford to sell because I don’t want to lose that rate’: 3% mortgage rates will loom large over the U.S. housing market for years to come” Yahoo Life, 2 Mar. 2023, https://www.yahoo.com/lifestyle/t-afford-sell-because-don-225152689.html
6. “Austin, Seattle, Phoenix and San Francisco will see double-digit drops in home prices” Daily Mail, 27 Feb. 2023, https://www.dailymail.co.uk/news/article-11799913/Austin-Seattle-Phoenix-San-Francisco-double-digit-drops-home-prices.html
7. “Threat of global housing slide looms amid rising rates” Federal Reserve Bank of Dallas, 28 Feb. 2023, https://www.dallasfed.org/research/economics/2023/0228
8. “Home Prices Will ‘Bottom Out’ in 2023, According to Experts” AOL, 3 Mar. 2023, https://www.aol.com/finance/home-prices-bottom-2023-according-170112274.html