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Economists warn that the US housing crisis could cause home prices to plummet by 20%

According to top economists, U.S. home prices have fallen from their record highs earlier this year and could fall by as much as 20% by mid-2023.

In an analyst note, Ian Shepherdson, Pantheon Macroeconomics chief economist, stated that home prices had already fallen 5% since their May peak. According to his projections, August saw a 0.7% drop in seasonally adjusted home sales. This is the third monthly decline.

Shepherdson stated in his note that the “plunging trend” in sales had more to go and that prices were falling.

Inflation and rising borrowing costs have proved to be fatal for the housing market. Potential buyers are forced to cut back on their spending. Shepherdson is one of many experts who agree that the housing market is currently in recession.

The current recession, however, is unlikely to spread throughout the U.S. economy like the 2008 housing crash. The market is less exposed than the housing bubble of the mid-2000s.

Shepherdson stated that although a headlong crash in prices is unlikely due to the low inventory, he still anticipates a decline of as much as 20% by the middle of next year.

Inflation and rising borrowing costs have proved to be fatal for once-hot housing markets, leading potential buyers to cut back on their spending.

As it seeks to curb runaway inflation, the Federal Reserve is increasing its policy at a record pace. Five consecutive interest rate hikes have been approved by policymakers this year. This includes three consecutive 75-basis point increases in June, July, and September. This week’s meeting was concluded by Chairman Jerome Powell who indicated that an additional 125 basis points of rate hikes are possible this year.

According to Freddie Mac, the rate hikes have pushed the 30-year average fixed mortgage rate over 6%. This is the highest rate since 2008’s recession.

As mortgage rates rise, the demand for new houses is decreasing rapidly, which in turn causes home prices to drop.

In a report released Wednesday by the National Association of Realtors, they reported that home prices have declined from their June high of $413 800 to $389 500. Home prices have increased 7.7% year-over-year, making it the 126th consecutive month with an increase in home prices. This is the longest continuous streak in history.

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