A downturn in US home sales and prices is likely just beginning, a prominent economist warned on Thursday.
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said in a note to clients that the housing market’s recent slump is “still nowhere near the bottom, especially for prices.”
His forecast came after existing home sales dropped 5.9% to a seasonally adjusted annual rate of 4.81 million units in July, according to the National Association of Realtors.
Existing home sales have fallen for six straight months and have hit their lowest level since May 2020. The slump has coincided with a surge in mortgage rates over the last year, which compounded the affordability challenge for would-be homebuyers facing steep sale prices.
“The bottom is still some way off, given the degree to which demand has been crushed by rising rates; the required monthly mortgage payment for a new purchaser of an existing single-family home is no longer rising, but it was still up by 51% year-over-year in July,” Shepherdson said in a note to clients.
“To make matters worse, the market is now grappling with rapidly rising supply as well as crumbling demand,” he added.
Home prices that surged during the COVID-19 pandemic are set for more declines, according to Shepherdson. That’s despite the NAR’s data that showed the median existing-home price for all housing types in July was $403,800, an increase of 10.8% from July 2021.
“Seasonally adjusted prices are now clearly falling, down by 1.0% in July – the third straight drop – and will have to fall a lot further before the market reaches a new equilibrium,” Shepherdson added.
Some recent data points have triggered alarm bells for the US housing market, with some experts warning a correction is underway.
Earlier this week, the National Association of Home Builders declared a “housing recession” due to plummeting builder confidence, higher construction costs and the uptick in mortgage rates.
The NAR provided a more optimistic outlook, with the group’s chief economist Lawrence Yun noting the country was “witnessing a housing recession in terms of declining home sales and home building” but “not a recession in home prices.”
The housing market has been noticeably impacted by the Federal Reserve’s recent effort to tighten monetary policy through interest rate hikes.
In the minutes from the Federal Open Market Committee’s July meeting, officials said “housing activity had weakened notably” and predicted that the “slowdown in housing activity would continue.”
Shepherdson asserted the “turmoil in the housing market alone won’t change the Fed’s policy path.”
“But for those on the FOMC who are worried about overdoing the pace of tightening, it will set alarm bells ringing. At the margin, this makes it more likely that the Fed will pivot to 50bp hikes in September,” he said.