Home News 25% Home Price Declines Coming, Economist Says

25% Home Price Declines Coming, Economist Says

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  • Home prices have been falling since early 2020.
  • But demand for housing has fallen as the Federal Reserve tightens policy to keep inflation in check.
  • Interactive Brokers’ José Torres believes home prices are expected to fall by double digits.

When Interactive Brokers Senior Economist Jose Torres said this July He saw home prices hit a 2008-style crash, 30 year fixed mortgage rate is about 5.5%, and June’s S&P/Case-Shiller U.S. National Home Price Index Just hit a new high.

Shortly thereafter, mortgage rates continued their surge this year, surpassing 7%.

mortgage interest rate

freddie mac

Home prices in the country have also officially started to fall.

house price case schiller

St. Louis Federal Reserve Bank

Given the shifting data, the consensus view on the housing market has turned generally bearish in recent months, leaning toward Torres’ outlook.

But lower inflation could once again mean an optimistic outlook for investors and homeowners.

The consumer price index cooled in October, with inflation reaching 7.7% y/y, down from 8.2% in September and 8.5% in August. While the Federal Reserve has said it will continue to tighten policy in the coming months to keep inflation in check (and intends to keep it tight once it pauses rate hikes), the downward trend in the CPI has Banks to return to dovish policies next year.

Mortgage rates have started to fall in the past few weeks, as have bond yields, which is good for demand.

But Torres disagrees that inflation will continue to fall so rapidly that the Fed can pivot. Those observations are the cornerstone of his call for home prices to fall about 25% in his Case-Shiller Index by the second half of 2023, which he repeated this week.

Such a national decline is similar to the decline in housing prices seen during the 2008 financial crisis. At this time, the index fell 27% from its July 2006 peak to its February 2012 trough. It has lagged other home price data over the past three months. However, in individual cities such as Phoenix and San Francisco, prices fell by up to 30% and even worse during the crisis. As of September 2022, average home prices in Phoenix have fallen 10% since June, according to Realtor.com.

Torres told Insider he expects the federal funds rate to peak around 5.38%, while the market consensus is 5.13%. He also said inflation would last longer than consensus due to the number of job openings that still exist and the high wages employers have to pay. Torres said the decline would not be as big if it reversed.

Demand-supply dynamics caused a ‘perfect storm’

Torres believes the dynamics of supply and demand are headed for a major downturn.

Affordability paints a bearish picture for Torres on demand, with monthly housing costs historically high relative to income. This is due to rising mortgage interest rates. “Buyers are invisible,” Torres said of the market.

affordable housing

Yardeni research

“As in the months leading up to the 2008 real estate market crash, average monthly payments as a percentage of household and personal income have been at record highs throughout this year, leading to a We can’t afford a home,” Torres said in a note.

On the supply side, builders are racing to scale up to meet surging demand. The inventory of new homes has risen by about 25% since last summer, reaching nearly 1 million units, he said.

But with low affordability holding back demand, home builders will now have to offer lower prices to clear inventory, which will cause prices to fall for existing homes, he said. Torres said.

“The supply of new homes has increased significantly, and home builders have relied on discounts and concessions to sell, while the supply of existing homes remains constrained. Owners clinging to low interest rates. because there is little incentive to sell,” Torres said. “At some point early next year, homeowners who need to sell will have to lower their prices to compete with the prices of new homes.”

He continued, “The macroeconomic backdrop for home builders continues to deteriorate, with the Federal Reserve continuing to raise interest rates, shrinking balance sheets, increasing borrowing costs, and reducing available credit. , is likely to get worse as it leads to lower liquidity levels.This headwind has already caused home prices to fall, with prices falling for two straight months earlier this year.”

The normalization of cities after COVID-19 has also contributed to the drop in high demand for more suburban properties seen during the pandemic, Torres said. Moreover, crashes in other asset classes like stocks are bearish for housing demand, a phenomenon known as the negative wealth effect.

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