- The US housing market is cratering as the Fed’s rapid rate hikes send mortgage costs soaring.
- Home sales have declined for 8 months and prices are falling. But economists say worse is to come.
- Here’s what Jeremy Siegel, Paul Krugman and 5 other top experts say about how painful things are going to get.
Alarm bells are already ringing for U.S. homeowners, as rising mortgage rates scare away buyers — and the downturn in the U.S. housing market is only going to get worse, experts say.
Signs of stress have become apparent. Recent data showed that sales of existing homes fell 24% in September – the eighth straight monthly decline, marking the longest decline since 2007. Housing starts fell and the number of new homes fell 22%.
Behind the deteriorating housing market is the Federal Reserve, which is aggressively raising interest rates to combat 40-year high inflation. That has sent mortgage rates soaring to 20-year highs.
That has made buying a home more expensive, causing buyers to back off – mortgage applications are at their lowest since 1997. At the same time, growing concerns about a coming economic recession have dampened demand.
Here’s what 7 top experts warn about what’s next.
Jeremy Siegel, Wharton Professor of Finance
“I expect home prices to fall 10% to 15%, and home prices to accelerate on the downside,” Siegel told CNBC in a recent interview, noting that by any measure, home prices are going down.
In a separate interview with CNBC, he said: “I think we’re going to have the second biggest housing price decline since the post-World War II period in the next 12 months. That’s a very, very important factor for prosperity [and] for equity in the housing market.”
Mark Zandi, chief economist at Moody’s Analytics
“Strap in. If interest rates stay close to the current 6.5% and the economy moves around recession, national home prices will fall nearly 10% top to bottom,” he said in a recent tweet. “Most of these declines will happen sooner rather than later. And house prices will fall by 20% if it becomes a typical recession.”
In a recent housing report, he said: “The housing market is the most interest rate-sensitive sector of the economy. It is on the front lines of the fallout from the Fed’s efforts to bring down inflation.”
“It’s going to be a coast-to-coast downturn in the housing market. It’s going to be brutal. No part of the market is immune.”
David Rosenberg, veteran economist and Rosenberg’s head of research
“We have a massive housing bubble right now. Most of the household balance sheet is residential real estate, and that’s stocks,” Rosenberg said in a RealVision interview released this week.
The economist pointed to the Fed’s tightening efforts to bring inflation down from recent rates of 8-9% to its 2% target.
“They want the stock market to go down. They want housing prices to go down. Why? Because there’s not a snowball’s chance in hell they’re going to hit their 2% holy grail of consumer inflation, without there being a period now of asset deflation. It’s 100% necessary.”
Paul Krugman, Nobel Prize-winning economist
The veteran economist agrees that a serious downturn is on the way – but he expects it will be a while before higher prices really hit home prices and demand.
“The Fed’s interest rate hikes have indeed led to a sharp drop in building permit applications. But construction employment has yet to even begin to decline, probably because many workers are still busy completing houses started when interest rates were lower,” he said in a recent comment .
“And the broader economic effects of the coming housing downturn are still many months away,” he said.
Ian Shepherdson, Chief Economist at Pantheon Macroeconomics
Shepherdson believes the steep decline in home sales hasn’t bottomed out yet, and even buyers aiming lower for cheaper homes will still face bigger mortgage payments.
“We expect a 15-20% decline over the next year, to restore the pre-Covid price-to-earnings ratio,” the strategist said in a note last week.
“In short, housing is in freefall. So far most of the hit is in sales volumes, but prices are now falling as well, and they have a long way to go.”
Don Peebles, real estate developer and Peebles Corp. CEO
“I think the housing market is going into a recession. We’re going to see price declines — price declines have already started,” Peebles told Fox News last week.
“I look at this like we have this freight train out of control, faster, faster with low interest rates, and no one seemed to start slowing it down or hitting the brakes. Now all of a sudden it’s going to come crashing into the station,” he said.
Chen Zhao, head of economic research at real estate agent Redfin
“The housing market is going to get worse before it gets better,” Chao said last week, alongside a report that found a record 22% of homes for sale had a price drop in September.
“With inflation still rampant, the Federal Reserve is likely to continue raising interest rates. That means we may not see high mortgage rates — the primary killer of housing demand — decline until early to mid-2023.”