House prices to fall by 4% - Capital Economics
US Housing

House prices to fall by 4%

US Housing Market Update
Written by Matthew Pointon
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The collapse in home sales, and hit to households’ income and savings, means house prices will fall back. But lender forbearance and the fiscal package will prevent a surge in forced sellers, and with lending standards much tighter a repeat of the late-2000s crash is unlikely. We expect a peak-to-trough fall in prices of around 4% by early 2021, with values then flattening out for the rest of the year.

  • The collapse in home sales, and hit to households’ income and savings, means house prices will fall back. But lender forbearance and the fiscal package will prevent a surge in forced sellers, and with lending standards much tighter a repeat of the late-2000s crash is unlikely. We expect a peak-to-trough fall in prices of around 4% by early 2021, with values then flattening out for the rest of the year.
  • Prior to the arrival of the coronavirus, there were signs that house price growth was accelerating. According to Case-Shiller, annual growth had risen to 3.8% y/y at the end of last year, a 10-month high. However, we were sceptical that prices were set for a strong acceleration. Despite low interest rates, tightening mortgage lending standards and stretched valuations would have kept house price growth in check.
  • The massive disruption to the economy caused by the virus means house prices will drop back. Housing demand will see a sharp decline as unemployment hits record highs, and households are prevented from buying a home due to the shut down of large parts of the economy. The risk premium will rise, so buyers’ willingness to pay for a home will fall, and house price expectations will take a hit.
  • However, a repeat of the 25% collapse in prices seen following the financial crisis is unlikely. Action taken since the crisis means home values are more resilient to a demand shock than they were back then. Lending standards have been tighter, so mortgage borrowers will be better placed to deal with a temporary drop in income. And, while valuations are stretched, in comparison to incomes prices today are around 18% above average, compared to 45% in the mid-2000s.
  • Alongside government action to shore up incomes for those who have lost their jobs, and widespread lender forbearance, that means we don’t except any rise in foreclosures this year. (See Chart 1 and Update.) And, in the absence of a surge in forced sellers on the market, the downside risk to prices is reduced. Indeed, even if someone wanted to sell a house, the shutdown means they are unable to do so.
  • We therefore expect the drop in house prices will be closer to that experienced during the recessions of the early 1980s and 1990s, when there was no rise in foreclosures, than the mid-2000s. In those cases, annual real house price growth hit a low of around -5%, compared to -15% during the financial crisis.
  • Our expectation that home sales will bounce back in the second half of the year as the economy begins to improve will also prevent a substantial fall in prices. But it will take time for household incomes and savings to recover. Therefore, after a drop in nominal values of 4% by early 2021, we expect prices will flatten out over the remainder of the year. (See Chart 2.) But the risks are to the downside. If the economic disruption lasts longer, and house price expectations turn sharply negative, values will see larger falls.

Chart 1: Mortgage Delinquencies & Foreclosure Start Rate (%)

Chart 2: Case-Shiller House Prices (% y/y)

Sources: MBA, Capital Economics

Sources: Case-Shiller, Capital Economics


Matthew Pointon, Property Economist, matthew.pointon@capitaleconomics.com