US Home Prices Decline at Fastest Pace Since 2008 Financial Crisis

We are in the middle of the most significant two-month drop in home prices since shortly after the collapse of the Lehman Brothers in September 2008. Prices have been declining at the fastest pace since the Great Recession, prompting some experts to believe we are entering a housing market correction.

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In August this year, home prices fell 0.98%, on the heels of another 1.05% decline in July. Home prices had peaked in June 2022, with the median price of a home reaching an all-time high of $440,300. Record high demand coupled with record low inventory in the 2020 housing market fueled the soaring prices, causing them to spike a record 42% over the last two years.

The housing market is considered to be in correction territory when home prices drop 10% to 20% below their peak market value

When housing prices drop, homeowners owe more on their mortgages than their house is worth. High mortgage rates, which hit 6.7% on average for 30-year fixed-rate loans in September, coupled with limited inventory and a record rise in prices, drove affordability to its lowest levels since the early 1980s, a stark contrast to the buying frenzy in 2020 and 2021 when mortgage rates hit a record low of 3%.

The higher rates have made monthly mortgage payments 74% more expensive than last year. It now takes 38.2% of the median household income to make an average monthly mortgage payment, pricing potential buyers out of homeownership.

Zonda chief economist Ali Wolf told Fortune how a housing boom formed in some regions due to the pandemic.

“The housing booms seen in markets like Austin, Boise, and Phoenix were among the earliest in the nation and the sharpest. The record-low mortgage interest rates combined with lifestyle changes brought on by the pandemic, including work from home and increased relocations, drove a dramatic uptick in housing demand, and supply could not keep pace.”

A housing market correction is different from a housing market crash. A market crash is much more sudden and sees a price drop of more than 20% from its most recent peak. Corrections return home prices to normalized levels of buying and selling, which is indicated by slower home price growth and homes being on the market for a longer time. Demand and supply also balance out. However, a correction could mark the start of a bear market. Since 1974, only five corrections have become bear markets, which means 80% have not.

As Fortune reported, the consensus on Wall Street is that we are entering a period of falling home prices, which may be the second-sharpest home price decline since the Great Depression.

Moody Analytics predicts a price drop of between 5% to 10%. Their chief economist, Mark Zandi, believes better lending practices and a tight housing supply could prevent a crash but won’t stop a correction. If the country slips into a recession, Moody Analytics predicts home prices will fall 10% to 15%. In overvalued regional markets, which are currently 210 of the nation’s 413 largest regional markets, prices could drop 10% to 15%. In an economic downturn, those regions could see a drop of 20% to 25%.

Zandi said the Federal Reserve’s monetary policy plays a significant role in the trajectory of the housing market.

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“The housing market is the most interest-rate-sensitive sector of the economy. It’s on the front lines of the fallout from the Fed’s efforts to bring down inflation.”

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There will be a “coast-to-coast downturn in the housing market,” and it will be “brutal,” Zandi says.

Morgan Stanley joined the housing bear crowd. The investment bank expects home prices to fall 7% by the end of 2023. The peak-to-low decline between 2006-2012 was 27%. The peak to trough decline during the Great Depression was 3.1%

“If we assume a 7% mortgage rate, affordability looks materially worse than today. And the pace of its deceleration has already more than doubled compared to almost any time in history…the positive takeaway—which we think puts the magnitude of this [7% forecasted home price] drop into perspective—is that this decrease would only bring home prices back to where they were in January 2022. That is still 32% above where home prices were in March 2020.”

In more favorable market conditions, Morgan Stanley analysts believe that if mortgage rates come back down by next spring, home prices may climb back to 5% in 2023. However, if we slip into a recession, the home price decline could exceed 10%,

Goldman Sachs predicts U.S. home prices will fall from 5% to 10%, reversing their prediction from last month that U.S. home prices would rise 1.8% in 2023.

Fitch Ratings says home prices could drop 10% to 15%.

“The likelihood of a severe downturn in U.S. housing has increased; however, our rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023 and further pressure in 2024. Although we recently affirmed the ratings and Stable Outlooks for our U.S. homebuilder portfolio, ratings could face pressure under a more pronounced downturn scenario that would likely include housing activity falling roughly 30% or more over a multiyear period and 10% to 15% declines in home prices.”

In a news conference last week, Jerome Powell, the chair of the Fed, said the housing market will likely have to go through a correction. The Federal Reserve recently raised its benchmark interest rate another 0.75% to a range of 3%-3.25%, the highest rate since early 2008.

“We’ve had a time of a red-hot housing market, all over the country, where famously houses were selling to the first buyer at 10% above the ask, before even seeing the house. That kind of thing. So, there was a big imbalance between supply and demand, and housing prices were going up at an unsustainably fast level. So the deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals, and that’s a good thing. For the longer-term, what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again.”

“We probably in the housing market have to go through a correction to get back to that place. There are also longer-run issues though with the housing market. As you know, we’re, it’s difficult to find lots now close enough to cities and things like that, so builders are having a hard time getting zoning and lots, and workers and materials, and things like that. But from a sort of business cycle standpoint, this difficult correction should put the housing market back into better balance.”

The Fed signaled that it would continue to raise the federal funds rate until the inflation rate drops from 8.3% to a target of 2%, potentially continuing to “hike until the funds level hits an endpoint of 4.6% in 2023.”

“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”

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