Are US Home Prices Headed For A Fall?

Are US Home Prices Headed For A Fall?
Jonathan Hobbs, CFA

over 1 year ago2 mins

If you’ve perused home listings in the last couple of years, you’ll have noticed how much more expensive bricks and mortar seem to have become. You’re not imagining it: data from the Federal Reserve proves that the average price of a US home rocketed 40% from April 2020 to April this year (orange line).

But while the Fed hasn’t released the data on how the market has performed since then, it has released the data on new homes. And that part of the market seems to be losing steam fast: the average price of a new home dropped by the most since records began in 1975, collapsing 20% in April and May. Prices didn’t even fall this quickly during the global financial crisis, when they took almost two years – from March 2007 to January 2009 – to slide 25%.

This collapse is probably down to the one-two punch of record-high inflation and fast-rising interest rates, which have made it much more difficult to buy a home on a couple of fronts. For one thing, inflation is reducing homebuyers’ disposable income, meaning banks are less likely to give potential customers a mortgage. And even if they do, interest rates have pushed mortgage rates up, making monthly payments much harder to meet than they would’ve been at the best of times. That’s led many Americans to write homeownership off as a pipe dream.

Still, the price of new homes suggests that the overall market has dramatically slowed down since April – a trend that could continue if rate hikes stick around. That’s good news for you if you’re looking to buy, albeit with an asterisk: a slumping market isn’t necessarily a cheap market. But more broadly, there’s reason to be worried: residential housing is the biggest sector in the world, and US residential housing is the biggest driver of the sector. So if it topples, the rest of the global economy could shudder to a halt too…

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