U.S. home prices have fallen from record highs earlier this year and they are likely to see even steep declines in the coming months as the Federal Reserve fights inflation.
According to a new release from Black Knight Data Analytics, prices have been posting the most significant monthly decline since the 2009 housing crash. Median home prices fell by 0.98% in August from a month earlier in the month, after a 1.05% drop in July. The median home price is down 2% since June peak.
After more than two years of record-breaking growth, they represent two consecutive months of significant pullbacks, said Ben Graboske, Black Knight President.
Recent outlooks from major Wall Street firms suggest this is just the beginning of what's likely to be a plunge in U.S. home prices.
Morgan Stanley believes that home prices could fall by 7% by the end of 2023. It would still be the second-fastest decline since the Great Depression, despite the fact that it was smaller than the 27% decline seen when the mortgage bubble burst more than a decade ago.
The investment bank blamed spiking mortgage rates for the expected decline.
Mortgage rates have doubled to 6.29%, according to Freddie Mac and are likely to march higher, with some forecasters calling for rates as high as 7%. The price of home price growth has cooled over the past month, but prices remain well above where they were just one year ago, putting affordability out of reach for many prospective buyers.
If you assume a 7% mortgage rate, affordability looks worse than today. The Morgan Stanley researchers wrote that the pace of its deceleration has already doubled compared to almost any time in history.
The housing sector is currently in a midst of a major correction with its aggressive rate hike plan as it tries to crush runaway inflation.
The U.S. central bank increased its benchmark interest rate by 75 basis points for the third consecutive month in September, following similar rate hikes in June and July - the most aggressive series of increases since 1994. The key federal funds rate is now at a range of 3% to 3.25%, the highest since the 2008 financial crisis. It is the fifth consecutive rate increase this year.
In addition to the large rate hike, Fed officials laid out an aggressive path of rate increases for the rest of the year. There are projections that policymakers expect interest rates to hit 4.4% by the end of the year, suggesting that another three-quarter percentage point increase is on the table.
Home prices could fall by 5% to 10% due to recent weakness in the market.
Even though inventory levels are historically low, house prices are falling even though inventory levels are still relatively low by measures of active inventory or months of supply the bank said.
Moody's chief economist Mark Zandi said that the sentiment was echoed by Moody's chief economist Mark Zandi, who sees home prices fall from 5% to 10% even if the economy averts a recession. If the economy falls into a recession, Zandi expects the decline to be even steeper at 10% to 15%, though he believes the sector will avoid a 2008 crash.
Fed Chairman Jerome Powell said that the housing market is likely to suffer due to policymakers' interest-rate hikes, something he has called a good thing. Powell said in September that we had a time of a red-hot housing market. The deceleration in housing prices that we are seeing should bring prices closer to rents and other housing-market fundamentals.