An economist warns that US home prices are on the verge of collapse as demand for new home “digging” increases

  • US home prices are already falling and set to fall in the coming months, an economist said on Tuesday.
  • “The next few months are going to be very difficult” for the housing market, Ian Shepherdson, chief economist at Pantheon Macro, told clients.
  • Real estate markets have boomed in 2020 and 2021, but are slowing rapidly as central banks raise interest rates, driving up mortgage costs.

Home prices in the US are already falling and are on the cusp of falling more sharply as demand for new homes “digs”, according to an economist at consultancy Pantheon Macroeconomics.

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

US new home sales data for June is due on Tuesday. Economists polled by Bloomberg expect sales to have fallen to 659K from 696K in May.

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

“The trend in new home sales is closely following the mortgage application numbers, which shows that demand is waning,” he said.

Shepherdson said that the continued decline in sales leads to an increase in the availability of homes relative to the number of buyers, which means that prices are likely to fall sharply.

Pantheon Macro estimated that existing single-family home prices fell a “huge” 1.8% in June from the previous month, after a 0.4% drop in May.

“The market is adjusting to a new reality, with much lower sales volumes and much more inventory. Thus, prices have to adjust to the downside, and potentially very much,” Shepherdson said.

The US housing market – like others around the world – boomed in 2020 and 2021 as central banks cut interest rates and people moved into more spacious real estate during the coronavirus pandemic. According to the Case-Shiller Index, home prices in the United States increased by 40% between February 2020 and April 2022.

However, the Federal Reserve and other central banks are now raising interest rates as they grapple with severe inflation. This led to higher bond yields and mortgage rates, which reduced demand for mortgages and home purchases.

Mortgage applications in the United States fell to their lowest level since 2000 in the week ending July 15, according to the latest update of the Mortgage Bankers Association Market Index last week.

The average 30-year mortgage rate was 5.54% last week, according to mortgage agency Freddie Mac. That’s more than double the 2.76% rate 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 fall 25% from peak to trough, in “something very similar to what we saw during the Great Financial Crisis.”

However, many analysts downplayed comparisons with 2008, saying that banks at the time were engaging in riskier lending practices.

The COVID boom “is not like the subprime mortgage bubble of the early 2000s,” said Dario Perkins, an economist at TS Lombard, in a note to clients last month.

“A really bad sub-prime-style crash happens when existing homeowners overburden and become vulnerable to a sudden rise in service costs – ultimately leading to a crisis among lenders,” he said.

“Such a dynamic seems unlikely today, even if the end of the COVID boom leads to lower housing prices.”

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