U.S. Home Prices Could Crash 25% This Year From Affordability And Mortgage Rate Issues

U.S. Home Prices Could Crash 25% This Year From Affordability And Mortgage Rate Issues

home prices

Photo: This decaying, 122-year-old Victorian home in San Francisco, marketed as "the worst house on the best block," sold for nearly $2M at auction. (AP Photo/Jeff Chiu, Jan. 14, 2022.)

As home prices were skyrocketing this time last year, Google reported that the search “When is the housing market going to crash?” had spiked 2,450 percent, and we know what happened next. From March 2021 to March 2022, the price of U.S. homes increased 18.8 percent — more than in any 12-month period leading to the 2008 subprime mortgage crisis.

If Zillow’s latest forecast turns out to be correct, it may get even worse for disappointed home shoppers who have lost one bid after another in the past year. The online real estate marketplace predicts that by May 2022, home prices will increase by 22 percent, year-over-year — an even greater acceleration.

Not everyone is buying Zillow’s prediction.

Ian Shepherdson, chief economist and founder of research consulting firm Pantheon Macroeconomics, predicts a drastic drop in the rate of home sales in 2022. In a research note Sunday, he projected that existing-home sales will decrease by 25 percent from the pace in February by the end of summer, Marketwatch reported.

“The housing market is in the early stages of a substantial downshift in activity, which will trigger a steep decline in the rate of increase of home prices, starting perhaps as soon as the spring,” Shepherdson wrote in a research note on Sunday.

Shepherdson cites the lack of affordable homes, rising mortgage rates, and a slowdown in mortgage demand as the basis for his prediction. The number of home loan applications is down more than 8 percent compared to a year ago, according to the most recent data from the Mortgage Bankers Association. And demand for refinancing has fallen almost 50 percent compared to last year.

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Most buyers need financing to buy a home and a drop in mortgage demand as homes become unaffordable could predict a downturn in home sales. As of Thursday, the average interest rate on a 30-year fixed-rate mortgage exceeded 4 percent for the first time since May 2019, according to Freddie Mac.

In December, the average 30-year fixed mortgage rate was 3.11 percent. Now, it’s up to 4.16 percent.

Rising mortgage rates since September have increased the cost of a monthly mortgage payment for a median-priced home by more than $400, or 27 percent, per Shepherdson’s calculations, Marketwatch reported.

“That’s a huge increase, even for households sitting on savings accumulated during the pandemic—a one-time increase in savings can’t finance an increase in mortgage payments for the next 30 years—and it will push demand down a good deal further,” he wrote.

In theory, rising mortgage rates should cool the housing market but real estate experts say we’re in uncharted waters. Some predict the housing boom will continue well into 2023. Others see rising rates causing a significant market slowdown.

Zillow researchers predict the value of homes will continue accelerating through the spring: “The robust long-term outlook is driven by our expectations for tight market conditions to persist, with demand for housing exceeding the supply of available homes.”

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About half the home buyers responding to a March 2022 USNews survey said affordability was their biggest concern, and nearly 70 percent said they regretted waiting and not buying a home or refinancing when rates were lower.

Shepherdson predicted a far-reaching ripple effect if there’s a shift in existing-home sales, with rent increases slowing and possibly even reversing, new-home sales falling and possibly affecting the economy with less demand for goods and services related to home-building, such as building materials and appliances.

The recent surge in home prices has been fuelled in part by a lack of housing inventory and competition for the few homes listed for sale. But a drop in demand won’t necessarily drive up the inventory, Shepherdson said. Sellers may decide not to list because “no one … wants to be the last person trying to sell into a falling market.”

One ray of hope for would-be homebuyers is the surge of new inventory about to come out of the ground as home builders try to keep up with demand and make up for the lack of existing homes on the market. U.S. homebuilders have a growing backlog of construction projects to work on that should pump supply into the housing market in 2022.

Photo: A pedestrian walks a dog past a recently sold Victorian home in San Francisco, Friday, Jan. 14, 2022. The decaying, 122-year-old Victorian marketed as “the worst house on the best block” of San Francisco recently sold for nearly $2 million, an eye-catching price that the realtor said was the outcome of overbidding in an auction. (AP Photo/Jeff Chiu)