The American housing market may fall even further as rising mortgage rates suppress demand and the stock of new homes begins to grow, according to Moody’s.
Walsh noted a spike in housing prices over the past decade. But mortgage rates have recently surged from around 3 percent at the end of 2021 to well over 6 percent today.
Up until early last year, the U.S. housing market had expanded greatly since the home loan crisis that helped spark the 2008 recession, partially due to an easy monetary policy and almost zero interest rates.
However, after inflation started to rapidly skyrocket to a 40-year high in mid-2022, the Federal Reserve aggressively hiked interest rates to about 5 percent to get the price situation under control.
The Fed’s higher borrowing rates have led to higher monthly payments on credit cards, car loans, mortgages, and other forms of debt.
“Home affordability is a major problem,” Walsh said, explaining that median home prices are “still very high relative to their historic values.”
He further predicted that the amount of salable homes will rise as the spring homebuying season begins, which has historically put downward pressure on prices.
Home Prices Likely to Drop Nationwide
Meanwhile, Lawrence Yun, chief economist at the National Association of Realtors (NAR) also believes that home values have appeared to peaked, after prices declined slightly in February 2023 from the previous year.“Half the country is experiencing price declines,” said Yun, who predicts that any correction is likely to be modest.
Rob Dietz, chief economist at the National Association of Home Builders, agreed, saying “we’re thinking this is going to be a moderate downturn.”
“Most markets are going to experience price declines in the high single digits,” Dietz predicted.
He said that the price correction would be nothing like the implosion in property prices during the Great Recession, when some housing markets experienced a 50 percent drop in value.
Still, home prices remain 28 percent higher from pre-pandemic levels, according to NAR data.
Since 2022, single family home bidding wars have since largely faded, while inventories are expanding and the fears of a housing market crash have eased.
“The market is clearly turning,” Yun said, but admitted that “we simply don’t have enough inventory.”
Housing Market Crash Not Expected
Prominent investor and GMO co-founder Jeremy Grantham is a well known market historian and gave a similar assessment to CityWire, commenting, “I don’t expect a crash but I expect house prices to drift back into more affordability.”Grantham also warned that declining house prices tend to curb economic growth.
Homeowners lose out when their homes drop in value, which leads them to cut back on spending.
Furthermore, average wages have not been keeping up with inflation, which has priced even more Americans out of home buyer pool.
Due to potential buyers being squeezed out by rising home prices and higher borrowing costs, many experts are expecting prices to fall.
“It doesn’t happen overnight, but housing casts a very long shadow and economically is more dangerous than the stock market,” Grantham said.
“I don’t expect a crash but I expect house prices to drift back into more affordability,” he added.
He also warned that the collapse of Silicon Valley Bank and Signature Bank in March could still cause a credit crunch.
He advised investors on fixed-incomes to be cautious in case further turmoil in the bank industry threatens the positive yields on bonds.
