The U.S. housing market has defied expectations of a crash so far this year, but a sharp drop in house prices could be imminent, according to a new analyst note from Pantheon Macroeconomics.
Contrary to popular belief that the housing market has already bottomed out and is now in full recovery, Hall of Fame economist Kieran Clancy argued that the better-than-expected performance seen this spring was just the result of “aggressive discounts and a lack of resale inventory – not a real recovery in the housing market.”
“We are baffled by the emerging narrative in the commentary that housing is recovering now, because it is not,” Clancy wrote in the note. “Home sales surged early in the year, lagging the mortgage rate cut of late 2022, but have fallen more recently thanks to the latest rate hike, and mortgage applications are signaling that they will soon plunge into a new weak cycle.”
For the housing market to truly recover, affordability must improve. A recent report by real estate analyst firm ATTOM suggests affordability fell again in the spring, with the median price of a single-family home hitting $350,000 in the second quarter. This represents a jump of 10% from the previous quarter, one of the largest increases in the last decade.
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The share of the average wage needed to own a home, meanwhile, soared to 33% in the April-June period. This is the highest debt ratio since 2007, meaning the market has been the least affordable for Americans in nearly two decades.
“The shift in sales to new homes, however, does not change the bigger picture that a sustained recovery in overall market activity is out of the question until affordability improves,” Clancy said.
He added: “Home sales cannot recover until affordability improves, which requires lower mortgage rates or lower home prices, or both. In short, the market housing market is not in the early stages of recovery; the downturn is simply morphing from a slump in demand, sales and construction, to falling housing prices and consumer spending.”
Although the of the Federal Reserve A 15-month interest rate hike campaign pushed mortgage rates above 7% for the first time in nearly two decades as house prices barely budged. This is at least partly due to the lack of homes available for sale.
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Sellers who locked in a low mortgage rate before the onset of the COVID-19 pandemic in early 2020 have been reluctant to sell, leaving eager potential buyers with few options. A recent report from Realtor.com showed that the number of homes available on the market in June was down more than 47% from the usual amount before the pandemic began.
With limited availability, more and more buyers are looking to new homes rather than existing ones.
The interest rate sensitive housing market cooled quickly following the Fed’s aggressive rate hike campaign. Policymakers have already raised the benchmark federal funds rate 10 straight times as they try to crush stubborn inflation and cool the economy.
However, the return to lower mortgage rates has not been smooth sailing. Rates on the popular 30-year fixed-rate mortgage are currently hovering around 6.96%, well above the rate of 5.51% recorded a year ago and the pre-pandemic average of 3.9% .
“The larger point here, however, is that most of the decline in house prices is yet to come; the lagged effect of falling sales outlets on a steep and sustained decline. The speed and magnitude price adjustment are uncertain, but the direction of travel is clear,” Clancy said.