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US Home Prices Could Drop 20% by Mid-2023 As Recession Hits: Economist

  • The US housing market is in recession, said Ian Shepherdson of Pantheon Macroeconomics.
  • House prices have fallen about 5% since May and could fall by another 20% by mid-2023, the economist said.
  • Federal Reserve officials have indicated they want a correction in the housing market.

The US housing market is in recession and house prices will fall another 20% by next summer, a top economist warned.

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“The declining trend in sales should continue and prices fall,” Ian Shepherdson, the chief economist of Pantheon Macroeconomics, said in a research paper published Wednesday.

Shepherdson and his team estimate that seasonally adjusted existing home prices fell 0.7% in August, the third monthly decline in a row. Prices are now down about 5% from their May peak and are poised to fall further despite tight housing supply, they said.

“The very low inventory level means a breakneck price drop is unlikely, but we still expect an overall drop to 20% by the middle of next year,” the economists wrote.

“Housing, in short, is in a recession and anything related to housing is now or will be in recession right now,” she added.

However, they emphasized that the current housing market downturn will not crash the rest of the US economy, as the market has less entrenched risks than it did during the housing bubble of the mid-2000s.

Still, there are growing concerns about the sector. Inflation, which reached a 40-year high in June and remained above 8% in August, has put pressure on consumer budgets.

The Federal Reserve has responded to the threat by raising interest rates from near zero at the beginning of this year to more than 3%, raising borrowing costs and pushing long-term mortgage rates north of 6% for the first time since 2008.

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The combination of dazzling valuations, rising cost of living and more expensive, less accessible credit has put pressure on house prices and sales in recent months.

Read:Bank of England hikes, says UK may already be in recession

The average price of an existing home has fallen 6% from an all-time high of about $414,000 in June to $390,000 in August, the National Association of Retailers said this month. In addition, sales of existing homes fell for the seventh straight month in August, down 20% from a year earlier, the trading group said.

Fed Chair Jerome Powell has indicated that the US central bank wants to lower house prices. That would help match supply and demand, bring valuation back to sustainable levels and make homes more affordable, he said during a press conference on Wednesday.

“We’ve had a time of a red-hot housing market across the country,” Powell noted. “The slowdown in house prices that we’re seeing should help bring prices more in line with rents and other housing market fundamentals. And that’s a good thing.”

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