Home prices could fall 20% amid risks of a ‘severe’ correction, Dallas Fed says

According to research by the Federal Reserve Bank of Dallas, US home prices could fall by as much as 20% as the highest mortgage rates in two decades threaten to trigger a “serious” price correction.

Fed policymakers must strike a delicate balance when attempting to deflate the housing bubble without bursting it, Dallas Fed economist Enrique Martínez-García wrote in the analysis released this week.

“In the current environment, with demand for real estate showing signs of slowing, monetary policy must tread carefully to reduce inflation without triggering a downward spiral in house prices – a significant property sell-off – that could exacerbate an economic downturn.” he said.

During the COVID-19 pandemic, home prices rose at a rate not seen since the 1970s, with mortgage rates near record lows, Martinez-Garcia said. Homebuyers, crammed with stimulus cash during the pandemic and craving more space, flocked to the suburbs; Demand was so strong and inventory so low at the peak of the market that some buyers skipped home inspections and appraisals, or paid hundreds of thousands over the asking price. This “fear of missing out” mentality has helped fuel a real estate “bubble,” he said.


A view of homes in a neighborhood in Los Angeles, California on July 5, 2022. (Photo by Frederic J. Brown/AFP via Getty Images)

But the Fed’s efforts to cool housing demand could spill over into the broader economy: a “pessimistic” scenario, in which the central bank continues to hike rates aggressively and prices fall by 15% to 20%, could be as much as 0.5% Plunge 0.7 percentage points from personal consumption spending, a data point measuring inflation-adjusted spending.


“Such a negative wealth effect on aggregate demand would further dampen housing demand, deepen the price correction and set in motion a negative feedback loop,” he warned.

Painfully high inflation and rising borrowing costs have already proved a deadly combination for the real estate market, forcing potential buyers to back off their spending.

sale of existing ones Houses fell to an annual rate of 4.43 million units for the ninth straight month in October, according to data released last week by the National Association of Realtors (NAR). On a yearly basis, home sales fell 28.4% last month.

Many experts agree that the housing market is now experience a recession this will only get worse fed tightening policies at the fastest pace in three decades to quell runaway inflation. Policymakers have voted for six consecutive rate hikes this year, including four consecutive hikes of 75 basis points in June, July, September and November.

US Federal Reserve Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell arrives to speak during a press conference following a Federal Open Market Committee (FOMC) meeting September 21, 2022 in Washington, DC. (Photographer: Sarah Silbiger/Bloomberg via Getty Images)


Concluding their meeting last month, Fed Chair Jerome Powell signaled that officials are planning more rate hikes despite Wall Street’s hopes of a pause.

“Let me say that,” he told reporters. “It is very premature to think of a break. When people hear delays, they think of pauses. In my view, it is very premature to talk about pausing our rate hikes. We still have a long way to go.”

The average price for a 30 year fixed mortgage fell to 6.61% this week, according to the latest data released by mortgage lender Freddie Mac on Thursday. That’s significantly higher than a year ago when rates were 3.10%, although they have fallen from a peak of 7.08%.

With rising mortgage rates, the demand for new homes is rapidly drying up.

But even if home ownership is unaffordable for millions of Americans, prices are still steeper than they were a year ago. The median price of an existing home sold in September was $379,100, up 6.6% from the same time a year ago, the National Association of Realtors said Friday.

This is the 128th straight month of year-over-year gains in home prices, the longest streak on record.


However, prices retreated slightly from the $413,800 peak recorded in June, part of a usual trend of price declines after the early summer peak.

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