The US housing market faces a 20% correction amid further rate hikes and overinflation in the housing market, the Dallas Fed warns
- The US housing market could fall by 20 percent due to the affordability crisis
- Rising mortgage rates could lead to a bigger drop in the market as it reaches 6.7%
- Home sales have increased significantly since the market boom in 2020
US home prices could fall 20 percent and rising mortgage rates could lead to a bigger crash as the affordability crisis deepens, the Dallas Federal Reserve warned.
Average home prices have increased significantly since 2020, when several people chose to sell their homes and move to the suburbs. But now several areas, including Austin, Texas and Phoenix, Arizona, are expected to see double-digit price declines by 2024.
The Dallas Federal Reserve attributed a 19.5 percent correction to the ongoing home-to-rent ratio and the affordability crisis. The house price to rent ratio compares the cost of a house to rent.
According to the authors of the report, Lauren Black and Enrique Martínez-García, the 19.5 percent “correction (is) necessary to bring the US into line with its fundamentals.”
US home prices could fall by 20 percent and rising mortgage rates could lead to a bigger crash as the affordability crisis deepens. House prices have risen enormously since 2019
The rising mortgage interest rate of 6.71 percent is deterring potential buyers. The number of mortgage applications has fallen to the lowest level in 28 years
The rising mortgage interest rate of 6.71 percent is deterring potential buyers. Declining home sales are a worrying sign for the housing market as it gears up for the spring buying season, which is usually the peak period for home sales.
Mortgage applications have fallen to their lowest level in 28 years in response to new signs that inflation remains stubborn.
If the Federal Reserve continues to raise mortgage rates, the drop could be less than 20 percent, the authors warn.
Meanwhile, the price-to-rent ratio in the US fell late last year as the cost of a home stabilized more than rent, according to the report.
If the observed price-rent ratio explodes relative to the fundamental ratio estimated with data on long-term interest rates and rent growth, the bubble hypothesis deserves consideration.
If the Federal Reserve continues to raise mortgage rates, the housing decline could be less than 20 percent
Mortgage rates rose to more than 7% in October as the Federal Reserve raised its benchmark rate at its fastest pace in 40 years, but began to fall late last year as there were signs that inflation was easing.
Stronger-than-expected data on inflation, job growth and consumer spending all prompted investors to up their bets that the Fed will continue to raise its policy rate throughout the summer.
The rate-sensitive housing sector has been hit hard by the Fed’s aggressive monetary tightening over the past year.
According to recent data from the National Realtors Association, existing home sales fell 36.9% in January for the 12th month in a row from a year ago.
The decline was nationwide, but was most pronounced in the West, where sales fell 42.4 percent year-on-year.
The median price in the West was still the most expensive in the country at $525,200, down 4.6 percent from January 2022.
In the Northeast, existing home sales fell 35.9 percent; in the south a decrease of 36.6 percent.
The Midwest fared slightly better, with existing home sales falling 33.3 percent.
The median home in the Northeast was $383,000; in the South it was $332,500; while in the Midwest it was the cheapest in the country, at $252,300.