US home prices could plunge 20%, Dallas Fed warns

US home prices could plunge 20%, Dallas Fed warns

According to a study by the Federal Reserve Bank of Dallas.

To be sure, the possibility of homes across the country losing up to a fifth of their value represents a “pessimistic scenario,” Dallas Fed economist Enrique Martinez-García noted in a report on Tuesday. But other economists have reported similar fears, with Pantheon Macroeconomics chief economist Ian Shepherdson earlier this year predict a similar crisis in house prices.

The pandemic has created an unusual elixir for the real estate market, with record high mortgage rates and work-from-home orders causing demand for home ownership to surge. At the height of the market, some buyers even renounced the traditional contingencies like inspections and offered tens of thousands of dollars off asking prices in order to win their bids — a “fear of missing out” mentality that fueled a “bubble,” Martínez-García said.

A sharp drop in house prices would likely have a ripple effect across the economy and further undermine the real estate sector. If house prices fell by 15 to 20 percent, according to Martínez-García’s pessimistic scenario, personal consumption could fall by 0.5 to 0.7 percentage points, he estimated.

“Such a negative wealth effect on aggregate demand would further constrain housing demand, deepen the price correction and trigger a negative feedback loop,” he warned.

High mortgage rates drive down home sales


Mortgage rates have moved from around 3% in January to around 7% currently, moving in tandem with the Federal Reserve. six rate hikes This year. The central bank wants to tame the highest inflation in 40 years by raising the cost of borrowing, which should temper demand from businesses and consumers.

Ideally, the Fed “will carefully thread the needle to bring inflation down without triggering a downward spiral in house prices – a massive home sell-off that could worsen an economic downturn,” Martínez-García wrote.

Home prices rose by a total of around 61% between 2013 and 2022, after adjusting for inflation – a jump that outpaced the previous housing bubble from 1998 to 2007, according to his calculations.

Higher mortgage rates should reduce the risk that the current “boom” in house prices will continue, Martínez-García added.

Demand increases for adjustable rate mortgages


For now, housing prices continue to rise. The national median price of an existing single-family home rose 8.6% in the third quarter, reaching $398,500, according to the National Association of Realtors. Still, the rate of price increases is slowing, as home prices jumped 14.2% in the second quarter, the industry group said earlier this month.

More and more buyers are being shut out of the market due to rising house prices and rising mortgage rates. The median income now required to buy a typical home is now $88,300, about $40,000 more than was needed before the pandemic in 2019, NAR said.

The market is particularly difficult at the moment for first-time buyers. Due to soaring mortgage rates, a typical first-time home buyer worth around $340,000 who put 10% aside would face a monthly mortgage payment of $1,808, or about $600 more than a year ago, according to the group’s calculations.

NAR’s chief economist, Lawrence Yun, predicted earlier this month that home sales would fall 7% next year as more people were pushed out of the market, but said he s expects median home price to rise 1%. One of the reasons he doesn’t expect prices to drop: Inventory remains tight, meaning buyers are still competing for sought-after properties.

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