U.S. house price inflation to plunge in 2023, fair value still a distant dream
2022.08.30 19:38
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FILE PHOTO: A “sold” sign is seen outside of a recently purchased home in Washington, U.S., July 7, 2022. REUTERS/Sarah Silbiger
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By Prerana Bhat and Indradip Ghosh
BENGALURU (Reuters) – Skyrocketing U.S. house prices will rise at their weakest pace in more than a decade next year as worsening affordability dents demand, according to analysts polled by Reuters, who said prices need to fall in double digits to be fairly valued.
A frenzy for homes in short supply over the past two years during the pandemic, backed by near-zero interest rates, has inflated house prices over 40% during that time, shutting out many first-time buyers.
But with rising mortgage rates following a cumulative 225 basis points of interest hikes by the U.S. Federal Reserve since March and more expected over the coming months, a slowdown was inevitable in a sector highly sensitive to the cost of borrowing.
The Aug. 12-30 poll of around 30 property analysts showed average U.S. house prices would rise 14.8% on average this year, slower than the current pace of around 20% but higher than the May poll’s prediction of 10.3%.
Those forecasts are based on the S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas.
House prices were then expected to rise only 2.0% next year, less than half of what was predicted in May. If realized, it would be the lowest pace since 2012 and below headline consumer inflation for the first time in over a decade.
“Home price appreciation is set to come to a screeching halt under the weight of poor housing affordability and a deteriorating economic and financial environment,” said Scott Anderson, chief economist at Bank of the West.
“This correction could happen all at once during a recession or gradually over time. No matter how you measure it today, home prices are extremely expensive.”
Reuters Poll: U.S. house prices https://fingfx.thomsonreuters.com/gfx/polling/akpezkdyyvr/Reuters%20Poll%20-%20U.S.%20house%20prices.PNG
The predicted slowdown was in line with a separate Reuters poll which showed a 50% chance of a U.S. recession within the next two years. [ECILT/US]
At its worst in decades, affordability is unlikely to improve significantly anytime soon as the 30-year fixed-rate mortgage rate was expected to remain above 5% at least until 2024.
Most analysts also agreed U.S. houses are highly overvalued.
When asked to rate average U.S. house prices on a scale of 1 to 10 where 1 was extremely cheap, 5 was priced about right and 10 extremely expensive, the median forecast of 26 contributors rated it 8. Four contributors said 10.
Nearly 80% of respondents, 16 of 21, who answered a separate question said prices needed to fall 10% or more to be fairly valued, including two who said 30% or above.
But there were notable inconsistencies in the responses. Some rating the market extremely overvalued provided modest figures to bring average prices to fair value while others who saw it less overvalued said a larger correction was required.
The last time U.S. house prices fell in double digits was during the global financial crisis, where cumulatively they fell by around one-third and in some cases more during 2007-09.
Although around one-third of contributors predicted an outright fall in prices at some point over the next two years, all were in single digits.
Most respondents said it would take several years for house prices to be fairly valued with a few saying it would never happen.
“Housing prices have outpaced inflation by a significant margin. … Prices are not likely to come down into ‘fairly valued’ territory for the foreseeable future,” said Crystal Sunbury, senior real estate analyst at RSM, a U.S.-based consulting firm.
Activity is already slowing as single-family housing starts, which account for the biggest share of homebuilding, fell to its lowest level since June 2020 and housing sentiment hovers around multiyear lows.
Existing home sales, which comprise about 90% of total sales and are currently at their lowest since May 2020, were predicted to decline further and average 4.73 million units over the coming year.
“Buyers remain spooked by the rapid rise in financing costs they have seen so far this year,” said Matthew Gardner, chief economist at Windermere Real Estate.
“The cautious attitude will continue until spring of 2023 when sales will pick up again, albeit modestly.”
(For other stories from the Reuters quarterly housing market polls:)
