US Home Prices Are About to Tumble as Demand for New Houses 'Craters,' an Economist Warns Ian Shepherdson, chief economist at Pantheon Macro, told clients "the next few months will be very tough" for the housing market.

By Harry Robertson

This story originally appeared on Business Insider

AFP | Getty Images via Business Insider

US home prices are already falling and are about to drop even more sharply as demand for new houses "craters", according to an economist at the consultancy Pantheon Macroeconomics.

"Single-family homes are about 15% to 20% overvalued, so the next few months will be very tough," Ian Shepherdson, chief economist at Pantheon Macro, said in a note to clients Tuesday.

Data on US new home sales for June is due out Tuesday. Economists polled by Bloomberg expect sales to have fallen to 659,000, from 696,000 in May.

However, Shepherdson said he is expecting a much bigger drop to 550,000. New home sales topped 1 million in August 2020.

"The trend in new home sales closely follows the mortgage application numbers, which make it clear that demand is cratering," he said.

The ongoing fall in sales is driving up the availability of housing relative to the number of buyers, meaning prices are likely to fall sharply, Shepherdson said.

Pantheon Macro estimated that single-family existing home prices dropped by a "hefty" 1.8% in June compared to a month earlier, following a 0.4% fall in May.

"The market is adjusting to a new reality, with much lower sales volumes and far more inventory. Prices, therefore, have to adjust to the downside, likely quite substantially," Shepherdson said.

The US housing market — like others around the world — boomed in 2020 and 2021 as central banks slashed interest rates and people moved to more spacious properties during the coronavirus pandemic. According to the Case-Shiller index, US home prices soared 40% between February 2020 and April 2022.

However, the Federal Reserve and other central banks are now hiking interest rates as they grapple with red-hot inflation. That's sent bond yields and mortgage rates soaring, damping demand for mortgages and house purchases.

US mortgage applications tumbled to their lowest level since 2000 in the week to July 15, the latest update of the Mortgage Bankers Association's market index showed last week.

The average 30-year mortgage rate stood at 5.54% last week, according to mortgage agency Freddie Mac. That's more than double the rate of 2.76% seen a year earlier.

The slowdown in the US housing market is worrying some economists and analysts.

José Torres, an economist at Interactive Investor, told Insider this week he expects US home prices to drop 25% from peak to trough, in "something very similar to what we saw during the Great Financial Crisis."

However, many analysts have played down comparisons to 2008, saying banks back then were engaged in much riskier lending practices.

Dario Perkins, an economist at TS Lombard, said the COVID boom is "nothing like the subprime bubble of the early 2000s", in a note to clients last month.

"A genuinely nasty subprime-style crash happens when existing homeowners have overextended themselves and are vulnerable to a sudden hike in their servicing costs – eventually leading to a crisis among lenders," he said.

"Such a dynamic seems unlikely today, even if the end of the COVID boom prompts a decline in house prices."

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