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Surge in mortgage rates makes house price falls likely

We have previously argued that a mortgage rate of above 6% represents the threshold at which house price falls become likely. With rates recently rising above that level, we are therefore revising down our house price forecast. That said, the prevalence of fixed rate mortgages, tight credit conditions and a relatively healthy labour market still rules out a price crash. We now expect annual house price growth will fall to -5% by mid-2023, followed by a gradual recovery to 3% by end-2024.
Matthew Pointon Senior Property Economist
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More from US Housing

US Housing Market Data Response

Case-Shiller/FHFA House Prices (Apr.)

House price growth is finally showing signs of slowing, in line with measures of housing market activity which peaked at the start of the year. Soaring mortgage rates are shutting some buyers out of the market and forcing others to cut their budgets. While a tight market argues against a house price crash, a small fall to around -5% y/y by mid-2023 now looks likely.

28 June 2022

US Housing Market Update

The anatomy of a housing market downturn

Measures of housing market activity and prices tend to follow a predictable sequence in downturns. In this Update we highlight the key US and UK variables that clients should follow to track the housing downturn and identify turning points. With most indicators already softening in both countries, it is just a matter of time before house prices fall. In view of the wider interest, we are also sending this US Housing Update to clients of our UK Housing Service.

24 June 2022

US Housing Market Data Response

New Home Sales (May)

New home sales rose in May, bucking widespread signs of a housing market slowdown. But given the volatility in the data we wouldn’t put too much weight on one month’s reading. After all, new home sales are not immune to higher financing costs and survey measures point to a fall in sales over the next couple of months. While a healthier inventory means the new home market will outperform existing sales, we still expect a fall in sales to around 630,000 annualised by end-2022.

24 June 2022

More from Matthew Pointon

US Housing Market Data Response

Housing Starts (May)

Housing starts in May recorded their largest month-on-month decline since the height of the COVID-19 pandemic. A fall in housing demand due to higher mortgage rates is occurring at the same time as home completions have hit a 15-year high, which will be dissuading builders from starting new projects. That dynamic will continue over the remainder of the year, and that will push single-family starts down to 850,000 annualised by the end of the year.

16 June 2022

US Housing Market Update

Existing home sales set for a sharper fall

Leading indicators are pointing to a large fall in existing home sales. For example, the recent sharp decline in the NAR buyer traffic balance is consistent with a fall in sales to 4.5m annualised which, excluding the COVID-related dip of 2020, would represent a 10-year low. Set against that, there is evidence of pent-up demand in the market which argues against a drop of that magnitude. Overall, the deterioration in leading indicators means we have cut our forecast for existing home sales to 4.8m by end-2022, a 22% y/y fall.

14 June 2022

US Housing Market Chart Book

Housing demand falls as mortgage rates rise

Housing activity is slowing in the face of higher mortgage interest rates. Mortgage applications for home purchase dropped to a two-year low in May, existing homes sales have declined in each of the three months to April and new home sales recorded their largest month-on-month decline in almost nine years. With mortgage rates set to rise further to around 5.5% by the end of 2022 and home buying sentiment collapsing to 40-year lows, activity will see further declines this year. That will soon show up in slowing house prices, which saw a record month-on-month rise in March. From around 20% y/y, we expect growth will drop to around 9% by the end of this year. Rental demand is also set to ease as affordability worsens. Coupled with a surge in supply that means rental vacancy rates will only see a small fall from here. Total returns are set to slow from 19% in 2021 to around 7% in 2022 and 5% in 2023.

9 June 2022
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