like the united states real-estate market continues to cool, a growing number of forecasters say homeowners could soon experience significant price drops. These analysts look at the record rise in home prices during the COVID pandemic and say a drop of 20 percent or more is looming in the near future.
“We’re at very, very foamy levels right now,” says James Knightley, chief international economist at ING Bank, the global financial institution. “Prices tend to overshoot on the downside.”
Knightley isn’t the only analyst predicting a sharp drop in home values in the near future. “For affordability back to 2020 [levels] at current interest rates, home prices have to drop more than 40 percent,” says Vitaliy Katsenelson, CEO and chief investment officer of Investment Management Associates.
Housing market boom slows
the Real-estate market caught fire in the spring of 2020 and continued to burn until mid-2022. Driven by a record low mortgage rates and pandemic-induced migration, home values have skyrocketed. Inventories reach historic lows. bidding wars it became common. That mismatch between supply and demand caused prices to skyrocket.
In March 2020, at the start of the pandemic in the US, the median price of an existing home was $280,700, according to the National Association of Realtors. By June 2022, that number had ballooned to $413,800, an increase of 47 percent and a new record high.
However, in mid-2022, the real estate market began to cool down. Mortgage rates soared past 7 percent, and the value of the houses began to recede in some markets. meanwhile at home sales have fallen for eight consecutive monthsa trend that indicates securities have become too rich for many Americans.
“Prices have to fall substantially to restore equilibrium,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in an analysis in late October. “The housing supply curve is not flat, so falling demand will push prices down.”
Price-to-income ratios are out of control
Pessimists compare home prices to median income, a basic measure of affordability. If the median home price is $360,000, for example, and the median household income is $90,000, then the price-to-income ratio is 4.
During the pandemic, Americans saw some increases in income, but their purchasing power soared mainly due to falling mortgage rates. That allowed buyers to absorb big increases in home prices and sent the price-to-income ratio above the levels seen during the housing bubble of 2005 to 2007, says Knightley.
“We have gone from 4 to 5.3 in the space of two years. That is a surprisingly large number,” she says. “The worrying thing is that to get back to 4, we need home prices to fall 20 to 25 percent.”
The dramatic rise in mortgage rates means monthly payments have skyrocketed. A $400,000 loan at a 3 percent rate, for example, would mean a monthly payment of $1,686. Taking a 30-year loan for the same amount at a 7 percent rate brings the payment to $2,661. That’s an increase of nearly $1,000 a month.
“It all comes down to who is going to [be able to] pay these mortgages? Knightley asks. “The pool of people who can afford that is rapidly shrinking.”
Shepherdson also points to the price-to-income ratio as a warning of declining home values. “We expect a 15 to 20 percent drop over the next year, to restore the pre-COVID price-to-income ratio,” Sheperdson writes.
A drop in values could spell trouble for those who bought at the peak of the housing market, and especially those who bought with low down payments. However, for the housing economy in general, an easing of the COVID-induced housing frenzy could prove healthy.
“If you are a first time buyerit’s immensely challenging,” says Knightley.
A more optimistic view of the real estate market
Even pessimists acknowledge that the US housing market has a lot going for it. On the supply side, there is no excess of homes for sale. New buildings fell to historically low levels after the Great Recession and have remained low. Meanwhile, many homeowners who would sell in normal times are staying where they are. They don’t want to give up their low-interest mortgages, creating a “seller’s strike.”
And on the demand side, the large Millennial generation is in its prime buying years, and the US has seen an increase in its Hispanic population, a demographic that also values homeownership.
With those factors serving as a safety net, many real estate economists expect only a minor correction in home prices. The Association of Mortgage Brokers, for example, does not predict any decline in home values across the country. The National Association of Realtors calls for a single-digit decline, while the National Association of Home Builders predicts a decline of perhaps 10 percent.
Lisa Sturtevant, chief economist at Bright MLS, a multiple listing service operating in seven states, summarizes the consensus opinion.
“House prices will fall from their peaks, but the fact that there is a contraction on both the demand and supply sides means that the price declines will not be severe,” says Sturtevant. “It’s a very different market than we had in 2008, when demand dried up and inventory increased as foreclosures, short sales and new construction flooded the market.”
However, pessimists are not buying that opinion. “I’m just very, very skeptical of this notion that we’re going to see zero to 5 percent to 10 percent price drops,” says Knightley. “I would like to see zero, but I have a hard time seeing that as the result.”