US home prices are about to fall as demand for new homes craters, an economist has warned

According to an economist at Pantheon Macroeconomics Consultancy, US home prices are already falling and are about to fall even faster due to demand for new home “craters”.

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“Single-family homes are worth about 15% to 20% more, so the next few months will be very tough,” Ian Shepherdson, chief economist at Pantheon Macro, said in a note to clients on Tuesday.

New US home sales figures for June are due on Tuesday. Economists polled by Bloomberg expect sales to fall from 696,000 in May to 659,000.

However, Shepherdson said he expects a much bigger drop to 550,000. New home sales topped 1 million in August 2020.

“The trend in new home sales closely follows mortgage application numbers, which makes it clear that demand is declining,” he said.

Shepherdson said the ongoing decline in sales is driving up housing availability relative to the number of buyers, meaning prices are likely to drop sharply.

Pantheon Macro estimated that current single-family home prices fell by a “heavy” 1.8% in June compared to a month earlier, after falling 0.4% in May.

“The market is adjusting to a new reality, with much lower sales volume and far more inventory. Prices will have to adjust negatively, possibly substantially,” Shepherdson said.

The US housing market – like others around the world – boomed in 2020 and 2021 as central banks slashed interest rates and people moved to more spacious assets during the coronavirus pandemic. according to Case-Shiller IndexUS home prices increased by 40% between February 2020 and April 2022.

However, the Federal Reserve and other central banks are now hike in interest rates Because they are battling red-hot inflation. That’s why bond yields and mortgage rates rise, reducing demand for mortgages and home purchases.

US mortgage applications fell to them 2000. lowest level after For the week of July 15, the latest update of the Mortgage Bankers Association’s market index showed last week.

According to the mortgage agency, the average 30-year mortgage rate was 5.54% last week Freddie Mac, This is more than double the rate of 2.76% seen a year ago.

The slowdown in the US housing market is worrying some economists and analysts.

Jose Torres, an economist at Interactive Investor, told Insider this week that he expects US home prices to 25% fall from top to trough“Much like what we saw during the great financial crisis.”

However, many analysts have underestimated the 2008 comparison, saying that banks were engaged in too risky lending at the time.

Dario Perkins, an economist at TS Lombard, said the COVID boom is “nothing like the subprime bubble of the early 2000s”, in a note to clients last month.

“A really bad subprime-style crash occurs when existing homeowners overextend themselves and are vulnerable to a sudden increase in their servicing costs—eventually causing distress among lenders,” he said.

“Such dynamics seem impossible today, even if the end of the COVID boom may signal a collapse in home prices.”