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Experts predict a 20% plunge in the US housing market: What are the reasons?

After a housing boom at the start of the pandemic analysts are now expecting a major adjustment in the market.

US Finance: Latest Updates

The price of homes in the United States could slump by nearly 20% this year as sky-high mortgage rates slash the demand for property. After a series of interest rate hikes over the past 12 months typical mortgage rates are now at the highest level for nearly two decades.

The pandemic boom in the housing market felt in 2020 has created a tumultuous situation in the US economy. This week the Dallas Federal Reserve released an analysis warning that a major readjustment could be on the cards.

Lauren Black and Enrique Martinez-Garcia have identified potential trouble in both the US and German housing markets that could “pose a vulnerability to the global outlook because of the size of those nations’ economies and significant cross-border financial spillovers.”

Prices in the US are currently way higher than the market fundamentals would suggest and experts believe that a decline of 19.5% would be required to bring house prices back in line.

Why is the housing market expected to fall?

For much of the first year of the pandemic the housing market boomed as mortgage rates fell to all-time lows and prospective homeowners looked to snap up affordable deals. This surge in demand and the additional savings that many buyers built up during periods of lockdown pushed prices to record highs.

However prices appeared to have peaked by 2022 and by December the US housing market had experienced 11 consecutive months of declining sales. Now that the demand has dried up and mortgage agreements have become far more expensive vendors have been forced to drop prices and the market as a whole has slumped.

BankRate analysts compare the current situation to the period from 2005-2007 when a real estate bubble formed in the US and plunged the economy into recession. However the upcoming downturn is not expected to be anywhere near as damaging as the 2008 crash.

Will there be a repeat of the 2008 Great Recession?

Comparisons to 2008 will not make comfortable reading for homeowners but there are some key differences that will prevent this situation from escalating to those levels. Although mortgage rates have increased and house prices are falling, the typical homeowner’s personal finances are in far better condition than was the case 15 years ago. This will prevent a repeat of the foreclosure crisis that swept the nation in 2008.

“The wild ride known as the U.S. housing market slowed dramatically in the fall of 2022, as mortgage rates surged and home prices remained high,” said Molly Boesel, principal economist at CoreLogic.

“Home sales started strong in early 2022 but took a nosedive later in the year. On the plus side, generous amounts of home equity will protect many borrowers from experiencing the type of foreclosure activity seen during the Great Recession.”

These trends are expected to continue for much of 2023, until the Federal Reserve feels confident enough to reverse the interest rate hikes implemented last year. For now, expect demand to stay fairly low and house prices to continue their steady drop from the pandemic-induced high of September 2021.