U.S. home prices could fall as much as 20% next year

Home prices have slumped during the second half of 2022, with demand for residential real estate cooling off in a number cities across the U.S. Prices could continue to fall by as much as 20% next year as mortgage rates climb and the housing market normalizes in wake of the pandemic, according to a noted Wall Street economist.

Ian Shepherdson, chief economist with Pantheon Macroeconomics, said in a report last week that tumbling demand for homes amid sharply rising mortgage rates is weighing heavily on housing prices. 

"[W]e expect home sales to keep falling until early next year. By that point, sales will have fallen to the incompressible minimum level, where the only people moving home are those with no choice due to job or family circumstances," he said. "Discretionary buyers are disappearing rapidly in the face of the near-400 [basis point] increase in rates over the past year."

Economists at Goldman Sachs said they expect home prices to fall by a more modest 5% to 10% next year. 

Cities that saw the sharpest spikes in home prices last year are now seeing them return to earth, including places like Austin, Texas; Phoenix, Arizona; Salt Lake City, Utah; and Denver, Colorado. 

• Mortgage rates have more than doubled over the last year — and could keep climbing
  
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Home sales fell to 4.7 million last month, down 1.5% from August, according to the National Association of Realtors (NAR). 

Rising interest rates could further tighten supply

Mortgage rates have more than doubled this year. The average rate on a typical 30-year mortgage rose this week to 6.94%, from 3.2% in January. The average rate on 15-year, fixed-rate mortgages is now 6.23%, compared with 2.33% a year ago.

"Higher interest rates, combined with elevated home prices, have put the cost of a home out of reach for many potential buyers," EY Parthenon Chief Economist Gregory Daco said Tuesday. "Home price growth should continue to slow rapidly and is set to contract markedly next year."

Rising rates have also forced some homesellers to pump the brakes on selling their property because they would have to get a mortgage to buy another home as rates are surging. 

"It's entirely possible that even people who want to trade down will face a bigger monthly payment," Shepherdson said. "That's a good reason to stay put, thereby constraining supply."

The inventory of unsold existing homes fell for the second straight month in September to 1.25 million, according to NAR data. 

The supply of homes available for sale will likely shrink next year, predicted Shepherdson, while noting that "prices have to fall substantially in order to restore equilibrium."

"We think inventory could increase modestly in the next month or two as homes sit on the market for longer, but new listings continue to decline as sellers retreat to the sidelines," Nancy Vanden Houten, lead U.S. economist with Oxford Economics, said in a research note. 

The median home sale price rose to $384,800 in September, up 8.4% from a year ago, according to NAR. In some parts of the country, that figure could be higher or lower, said Bright MLS chief economist Lisa Sturtevant.

"Even the September home price data may not be capturing what is going on in the fast-changing housing market," Sturtevant said. "Sellers are having to reset their price expectations because buyers' purchasing power has been seriously eroded as a result of the quickly rising mortgage rates."

How high will rates go?

Economists expect mortgage rates to continue climbing next year as the Federal Reserve further pushes up borrowing costs in a bid to curb inflation. Rates could reach 8.5% "which would be another big shock to the housing market," NAR Chief Economist Lawrence Yun told a group of real estate investors last week. Other analysts predict mortgage rates could hit double digits. 

Whalen Global Advisors said it expects rates to reach double-digits by April 2023. Mortgage rates have not hit those levels since 1989, when they were 10.25%. The highest mortgage rate in U.S. history was 16.64% in October 1981.

Mortgage rates have soared nearly 3.8% since the end of 2021, according to Oxford Economics. Wall Street analysts expect the Fed raise to raise its benchmark interest rate by up to an additional 1.5% by year-end. 

"At the beginning of the year, it seemed very unlikely that mortgage rates would push past 6%," Sturtevant told Realtor Magazine. "Now the question is how high will they go? A lot of the answer depends on how aggressive the Federal Reserve is going to go on rate hikes in its next two meetings."