No Floor Insight for Declining Home Prices

On Thursday, a leading economist stated that US home prices could plunge by up to 20% within the next year as spiking mortgage rates lead to a standstill in the housing market.

In September, existing-home sales continued their decline for the eighth consecutive month, falling 1.5% to an adjusted annual rate of 4.71 million units, according to the National Association of Realtors. The slump is the longest in 15 years with sales dropping by nearly 24% compared to this time last year.

There is still no ‘floor in sight’ for falling home sales, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics. With mortgage rates surging toward 7%, more and more people are finding it difficult to afford a home. Shepherdson believes home prices will fall rather sharply next year due to weakened demand. He estimates a 15% to 20% decline.

“If you’re planning to move homes and will need a new mortgage, you will face a huge increase in rates,” Shepherdson said in a note to clients. “It’s entirely possible that even people who want to trade down will face a bigger monthly payment; that’s a good reason to stay put, thereby constraining supply.”

“But prices have to fall substantially in order to restore equilibrium; the supply curve for housing is not flat, so the plunge in demand will drive prices down,” he added.

This week, mortgage rates rose to 6.94 percent, the highest level in more than 20 years. The current level is more than double what it was this time last year when it averaged 3.09 percent.

The rate of increase is challenging potential home buyers who are already facing affordability issues. In fact, Pantheon predicts that home sales will start dropping early next year as fewer people apply for mortgages due to rising interest rates.

“By that point, sales will have fallen to the incompressible minimum level, where the only people moving home are those with no choice due to job or family circumstances,” Shepherdson added.

The median existing-home price for all housing types in September was $384,800, an 8.4% jump year-over-year ($355,100), according to the National Association of Realtors. However, the median sales price has declined for three consecutive months since reaching a record high of $413,800 in June.

In October, homebuilder confidence fell for the 10th month in a row and reached its lowest level in a decade, according to the National Association of Home Builders’ (NAHB) monthly survey. NAHB’s survey also showed that traffic of prospective buyers recently hit its lowest level since 2012 (not counting the two-month period in 2020 when the pandemic first started). According to Ian Shepherdson, the survey’s results were “disastrous.”

It goes without saying that all indications point to a difficult housing market in the near future.

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