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U.S. housing prices could plunge 20%, Dallas Fed warns

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A sharp rise in mortgage rates in 2022 could plunge U.S. home prices by as much as 20%, according to a Federal Reserve study. Dallas.

Dallas Fed economist Enrique Martínez Garcia said indeed that the possibility of domestic homes falling to one-fifth of their value represents a “pessimistic scenario.” I got it in Tuesday’s report. But other economists have expressed similar concerns, along with his economist Ian Shepardson, chief of Pantheon Macroeconomics earlier this year. Predict a similar slump at housing prices.

The pandemic has created an extraordinary panacea for the real estate market, with record-low mortgage rates and work-from-home orders boosting demand for homeownership.At the height of the market, some buyers Abandoning traditional contingencies In order to win their bids, Martinez Garcia said, he conducted inspections and offered tens of thousands of dollars more than the asking price.

A sharp drop in house prices could have ripple effects across the economy, further weakening the real estate sector. In Martínez-García’s pessimistic scenario, if house prices fell by 15% to 20%, private consumption could fall by 0.5% to 0.7%, he estimates.

“Such a negative wealth effect on aggregate demand would further constrain housing demand, deepening price adjustments and initiating a negative feedback loop,” he warned.

High mortgage rates push home sales down


Mortgage rates have jumped from about 3% in January to about 7% now, keeping pace with Federal Reserve policy. 6 rate hikes this year. The central bank wants to keep inflation at a 40-year high by raising borrowing costs to keep demand down from businesses and consumers.

Ideally, Martinez García said the Fed would “prudently pass the needle on inflation without triggering a downward spiral in house prices – a large decline in house prices that could exacerbate a recession.” Stated.

In total, house prices increased by about 61% between 2013 and 2022 after adjusting for inflation. According to his calculations, from 1998 he surpassed the previous housing bubble through 2007.

Rising mortgage rates would reduce the risk of the current “boom” in house prices continuing, Martínez-García added.

Growing demand for variable rate mortgages


For now, house prices are still rising. According to the National Association of Realtors, the national median price of existing single-family homes rose 8.6% in the third quarter to $398,500. Still, the rate of price gains has slowed given that house prices rose 14.2% in the second quarter. said earlier this month.

Rising house prices and higher mortgage rates are driving more buyers down from the market. According to the NAR, the median income required to buy a typical home is now $88,300, about $40,000 more than was needed before the 2019 pandemic.

At the moment, the market is particularly tough for first-time buyers. With mortgage rates soaring, the typical early-stage homebuyer worth about $340,000 would face $1,808 monthly mortgage payments with a 10% down payment, according to the group’s calculations. About $600 more than a year ago.

NAR Chief Economist Lawrence Yun had expected median house prices to rise 1% this month, while he expected median house prices to rise 1%. One of the reasons he doesn’t expect prices to fall is that inventories continue to be tight and buyers are competing for desirable properties.

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