The U.S. housing market has defied expectations for a crash so far this year, but a steep drop in home prices could be right around the corner, according to a new analyst note from Pantheon Macroeconomics.
In contrast to the widespread belief that the housing market has already hit peak and is now in the midst of a recovery, Pantheon economist Kieran Clancy asserted that the better-than-expected performance seen this spring was simply the result of aggressive discounts and a lack of resale inventory, not an actual housing market recovery. We are baffled by the emerging narrative in the commentariat that housing is now recovering, because it isn t t, he wrote in the note. Home sales have surged at the start of the year, lagging the dip in mortgage rates at the late--2022 dip, but they have seen a drop more recently thanks to the latest back-up in rates, and mortgage applications signal that they will soon dip to a new cycle low. To fully recover, affordability needs to be improved in the housing market. A recent report from the real estate analytics firm ATTOM suggests that affordability declined again in the spring as the cost of a median single-family house surged to $350,000 in the second quarter. That represents a 10% jump from the previous quarter, one of the biggest increases in the past decade.
The percentage of average wages required to own a home, meanwhile, skyrocketed to 33% in the period from April to June. That marks the highest debt-to-income ratio since 2007, meaning that the market is the least affordable for Americans in nearly two decades.
The shift in sales towards new homes does not change the bigger picture, which is that a sustainable recovery in overall market activity is out of the question until affordability improves, Clancy said.
Home sales can't recover until affordability improves, which necessitates lower mortgage rates or falling home prices, he said. The housing market is not beginning to recover; the decline is merely a result of a collapse in demand, sales, and construction, to falling prices and housing-related consumption spending. Although the 15 month-long interest rate hike campaign sent mortgage rates soaring above 7% for the first time in nearly two decades, home prices have hardly budged. At least in part this is because there is a lack of available homes for sale.
Sellers who locked in a low mortgage rate before the COVID-19 pandemic started in early 2020 have been reluctant to sell, leaving few prospects for eager buyers. The number of available homes on the market in June decreased more than 47% from the typical amount before the pandemic began.
When there is limited supply, more buyers are choosing to buy new houses instead of existing ones.
The interest-rate-sensitive housing market has experienced rapid decreases due to the Fed's aggressive rate-hike campaign. The Fed has already hiked the benchmark federal funds rate 10 times in an effort to curb inflation and cool the economy.
The return to lower mortgage rates has not been seamless, even though the housing market has seen more ups and downs, he said. rates on the 30-year fixed mortgage are now hovering around 696 %, well above the 5.51% rate recorded one year ago and the pre-pandemic average of 3.9%.
The broader point here, however, is that the bulk of the drop in home prices is yet to come; the lagged effect of the plunge in sales points to a steep and sustained drop. The pace and scale of the price change in prices is uncertain, but the direction of travel is clear, Clancy said.