For the housing sector to maintain historical trends, US home prices will have to drop by up to 20% over the next several years, a research firm warned.
DataTrek Research co-founder Nicholas Colas said recent correction cycles in the US housing market, such as the bubble in the 1990s and the implosion in the mid-2000s, took several years to resolve.
The US home price decline has only begun in the last few months, suggesting that it will continue for some time.
“US home prices need to fall by about 15-20 percent over the coming years in order to return to their long run growth trend. That process is clearly starting but has a good way to go,” Colas wrote to investors this week.
In June, peak home prices were 29% higher than their historical trends, according to Colas.
Due to the COVID-19 pandemic, US home prices surged to their highest level on record during a period of loose fiscal policy and low-interest rates. This year, prices have declined rapidly as a result of interest rate hikes by the Federal Reserve to keep inflation at bay and slow economic growth.
This year, mortgage rates have more than doubled, briefly topping 7% in October for the first time in 20 years. Freddie Mac reports that the average 30-year fixed-rate mortgage has a rate of 6.49% as of Thursday.
Home affordability for prospective buyers has been crushed by rising rates, and sellers have been forced to reduce their listing prices in an effort to boost interest.
“Higher mortgage rates will do part of the work in bringing prices back down, of course, but history says any correction in this market will take time,” Colas explained.
Colas’ prediction coincides with Pantheon Macroeconomics’ Ian Shepherdson’s, who also predicts home prices will decline by up to 20% during the current correction.
Fed Chair Jerome Powell described conditions during a boom in the housing sector during the pandemic era as a “bubble” that has since burst.
“Coming out of the pandemic, rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID,” Powell explained. “So you really had a housing bubble, you had housing prices going up very unsustainable levels and overheating and that kind of thing.”
“Now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand,” added Powell.