US home prices are on the cusp of a major correction due to “cratering” demand among cash-strapped buyers, a prominent economist warned in a note to clients on Tuesday.
Ian Shepherdson, a chief economist at Pantheon Macroeconomics, noted that single-family home listings have surged by 40% in the last four months even as unit sales plummet due to sky-high prices and rising mortgage rates.
Given current conditions, US home prices are likely “about 15 to 20% overvalued” compared to incomes, according to Pantheon’s calculations – setting the table for major declines.
“The market is adjusting to a new reality, with much lower sales volumes and far more inventory. Prices, therefore, have to adjust to the downside, likely quite substantially,” Shepherdson said.
Sales of new single-family homes plunged by 8.1% to 590,000 units in June, Commerce Department data showed on Tuesday. Sales have now fallen to their lowest level since 2020, according to Reuters.
New home sales figures “closely” follow the data on mortgage applications “which make it clear that demand is cratering,” according to Shepherdson.
Shepherdson also said clients should “ignore” the latest data from S&P CoreLogic Case-Shiller National Home Price Index, which showed a 1% month-to-month increase in prices on the national level in May.
The economist noted that the Case-Shiller report utilizes a three-month average and does not account for rapid changes in the US housing market.
“The sellers’ market of the early spring became a buyers’ market more or less overnight, as large numbers of potential purchasers had their spending power dramatically reduced—or were pushed out of the market altogether—by the surge in mortgage rates,” Shepherdson said.
As The Post reported last week, the volume of mortgage loan applications recently hit a 22-year low as prospective homebuyers face the dual pressure of surging inflation and high interest rates.
Mortgage rates have risen steadily as the Federal Reserve hikes its benchmark interest rates in a bid to cool the economy. The Fed is expected to enact another hike of at least three-quarters of a percentage point on Wednesday.
Pantheon Macroeconomics projects that seasonally-adjusted existing single-family home prices declined by 0.4% from April to May and by another 1.8% from May to June.
Another prominent economist, Mark Zandi of Moody’s Analytics, recently warned the housing market was on the cusp of a “deep freeze” due to soaring mortgage rates.