One research firm warned this week that US home prices would need to fall by 20% during a multi-year correction for the housing sector to return to historical trends.
The most recent correction cycles in the U.S. housing market, such as the bubble of the 1990s and the sector’s implosion in the mid-2000s, took several years to conclude, said Nicholas Colas, founder of DataTrek Research.
In the current market, U.S. home prices have started to decline over the past few months – suggesting that the decline will continue for the foreseeable future.
“U.S. home prices will need to fall by about 15 to 20 percent over the coming years to return to their long-term upward trend. That process is clearly just beginning, but there’s a long way to go,” Colas said in a note to investors this week. Taken by Insider.
Colas noted that June’s home price peak was 29% above the historical trend.
U.S. home prices have soared to record highs amid loose fiscal policy and low interest rates in response to the COVID-19 pandemic. However, prices began to fall quickly this year as the Federal Reserve raised interest rates to cool inflation and slow the economy.
Mortgage rates have doubled this year and briefly topped 7 percent in October for the first time in 20 years. As of Thursday, the average 30-year fixed-rate mortgage was 6.49%, according to Freddie Mac.
Rising rates have reduced the opportunity for prospective buyers to purchase a home, forcing sellers to lower their listing prices to drum up interest.
“Higher mortgage rates will do part of the job of driving prices down, of course, but history has shown that any correction in this market takes time,” Colas added.
The Post has reached out to DataTrek Research for further comment.
Colas’ prediction echoed that of Ian Shepherdson, chief economist at Pantheon Macroeconomics, who also predicted house prices would fall by up to 20% during the current correction.
In a speech at the Brookings Institution earlier this week, Fed Chairman Jerome Powell described conditions during the pandemic-era housing boom as a “bubble” that has since burst.
“After the pandemic, prices 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 said. “So you really had a housing bubble, you had housing prices going up to very unsustainable levels, overheating and things like that.”
“Now the housing market is going to come out the other side of that and hopefully come out in a better place between supply and demand,” Powell added.