The prices of U.S. homes could drop as much as 20% next year.
In a number of U.S. cities, demand for homes has slowed down, which has caused home prices to drop during the second half of 2022. A well-known Wall Street economist says that prices could keep falling by up to 20% more next year as mortgage rates go up and the housing market returns to normal after the pandemic.
In a report released last week, Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said that falling demand for homes and sharply rising mortgage rates are putting a lot of pressure on housing prices.
“We think that the number of homes sold will continue to drop until the beginning of next year. By then, sales will have dropped to the point where people only move because they have to for work or family reasons, “he said. “Discretionary buyers are leaving quickly because rates have gone up by nearly 400 basis points in the last year.”
Goldman Sachs economists said they think home prices will fall by 5% to 10% next year.
Cities like Austin, Texas; Phoenix, Arizona; Salt Lake City, Utah; and Denver, Colorado, which saw the biggest jumps in home prices last year, are now seeing them come back down.
The number of homes sold dropped to 4.7 million in September, which is 1.5% less than in August, according to the National Association of Realtors.
Increasing interest rates could make supply even tighter
Mortgage rates have risen by more than 100 percent this year.This week, the average rate on a 30-year mortgage went up from 6.92% to 6.94%. In January, it was 3.2%. The average rate for a fixed-rate 15-year mortgage is now 6.23%, up from 2.33% a year ago.
Some homeowners can’t sell their homes because they would need a mortgage to buy another one, and rates are going up. Shepherdson said it’s possible that even people who want to trade down will have to pay more each month. “That’s a good reason to stay put, which cuts down on supply.”
NAR data shows that the number of unsold existing homes fell for the second straight month in September, to 1.25 million.
Shepardson predicted that the number of homes for sale will probably go down next year. He also said that “prices need to go down a lot to get things back in balance.” The average price of a home sold in September was $384,800, which is 8.4% more than it was a year ago.
In a research note, Oxford Economics’ lead U.S. economist, Nancy Vanden Houten, said, “We think inventory could increase slightly in the next month or two as homes stay on the market longer, but new listings continue to drop as sellers stay on the sidelines.”
How high will rates get?
Economists think that mortgage rates will keep going up next year as the Federal Reserve raises borrowing costs even more in an effort to slow inflation. Rates could reach 8.5 percent, 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 think that mortgage rates could go above 10%.
Whalen Global Advisors said that it thinks rates will reach 10 percent by April 2023. The last time mortgage rates were that high was in 1989, when they were 10.25%. In October 1981, the mortgage rate was 16.64%, which was the highest in U.S. history.
According to Oxford Economics, mortgage rates have gone up by nearly 3.8% since the end of 2021. Analysts on Wall Street think that the Fed will raise its benchmark interest rate by up to 1.5% more by the end of the year.
“At the beginning of the year, it didn’t seem likely that mortgage rates would go above 6%,” said Lisa Sturtevant, chief economist for Bright MLS. “The question now is how far will they go. A big part of the answer depends on how fast the Federal Reserve will raise interest rates at its next two meetings. “