Economist who called the real estate bubble warns about the ‘rollover’ of the market in the future

  • The hot US housing market may finally be cooling off, according to economist Ian Shepherdson.
  • In recent notes, the founder of Pantheon Macroeconomics presented data that points to a market slowdown.
  • He said the slowdown is in its early stages and will unfold in the coming months.

After a remarkable two-year run, it appears that the united states real estate market you might finally start to see something that resembles a balance between buyers and sellers.

But according to Ian Shepherdsonthe founder and chief US economist in Pantheon Macroeconomicsthe recent increase in mortgage rates has been something like throwing a bucket of cold water on a market still on fire.

According to the Census Bureau and the Department of Housing and Urban Development, median house prices prices in the US have grown as much as 27.4% since the second quarter of 2020. But at the end of 2021, prices fell for the first time since early 2020. In notes to clients last week, Shepherdson detailed why the pace of US housing growth prices will slow down big time.

The most crucial factor is twofold: slowing demand and rising interest rates. the

Federal Reserve

raised interest rates for the first time since 2018 at their March meeting, and are expected to raise rates several more times in 2022 as inflation hovers at a four-decade high. This trend will continue to drive mortgage rates higher, as well as other consumer-focused borrowing costs.

With mortgage costs already starting to rise, demand for new loans and refinancing has fallen for three months in a row, according to the Mortgage Bankers Association Purchasing Index.

“The housing market is in the early stages of a substantial slowdown in activity, which will cause a sharp drop in the rate of increase in house prices, beginning perhaps as early as spring,” Shepherdson said. in a report last week.

“The 30-year median mortgage rate has risen about 125 basis points since last September, increasing the monthly mortgage payment for a median-priced home by $412, or 27%, per month,” he explained. “That’s a huge increase, even for households that have savings built up during the pandemic (a one-time increase in savings can’t finance an increase in mortgage payments over the next 30 years) and will drive demand much lower.” . “

mortgage payments

Pantheon Macroeconomics

The drop in demand will also affect the supply of housing. Shepherdson, who was one of several prominent economists and analysts who predicted the subprime crisis and housing crash of 2007-2008He noted that existing home sales have started to drop, which is helping to increase the supply of homes on the market.

He predicts that the number of existing home sales is likely to continue to fall in the coming months, adding much-needed inventory to the overheated housing market. He believes sales will drop to 4.5 million by the end of this summer, a stark contrast to the roughly 6 million existing homes that sold last February.

New home sales are also starting to drop, a trend that Shepherdson says will continue, which is also helping to increase supply.

And it’s this combination of rising mortgage interest rates, falling demand and rising inventory that is starting to slow price growth, Shepherdson said.

The graph below shows the average over the past six months of how many months of supply homes are on the market (green line, left axis). Months supply reflects how many months of home inventory is on the market considering how many houses come off the market per month on average. Median new home price growth is also shown (black line, right axis), which tends to follow supply patterns since at least 2005.

housing offer and price

Pantheon Macroeconomics

“Recently, prices have risen much faster than the inventory figures imply, perhaps because a shortage of existing home inventory has fueled demand for new properties, but our second chart shows that they are starting to correct. This process it has a lot more to go,” he added in an email to clients on Wednesday, referring to the chart above.

Rental price growth will also start to fall, probably next year, he said.

Some other notable property market experts have also recently published research or commentary that aligns with Shepherdson’s prognosis.

Scott Brean, head of fixed income strategy at Brean Capital, said on Wednesday that he anticipates price growth will start to “level off” later this year, falling to around 4-8% growth. house prices have gone up 19.2% in the last yearbased on S&P/Case-Shiller US National Home Price Index.

Desmond Lachman, a senior fellow at the American Enterprise Institute and a former deputy director of the International Monetary Fund, recently told Insider that rising interest rates will be a big drag on home prices, even if demand continues to outstrip supply in the market. . This is because higher mortgage rates directly affect a borrower’s purchasing power by lowering the total home price that buyers can realistically afford.

“Interest rates are pretty critical,” Lachman said in February. “There may be underlying factors in housing, like population and household formation, the fundamentals may look good on that side, but if you’re going to have a fairly large increase in interest rates and a fairly profound change


their house prices are going to go down.

Ivy Zelman, founder of the research firm Zelman & Associates and a former Credit Suisse analyst, also recently said on the BiggerPockets podcast that she expects a rush of inventory to hit the housing market due to overbuilding and supply chain issues that will eventually be resolved.

Others, however, remain bullish on the market. David Greene, host of the BiggerPockets podcast and owner of a mortgage company, he told Insider in early March that the biggest price gains in the housing market are yet to come.

“Prices are going to continue to go up. I think they’re going to go up faster than we can handle them,” Greene said. “I think this spring is going to be one of the busiest and most difficult home buying seasons we’ve ever seen.”

He said this is because the demand he is seeing for mortgages in his business continues to far outstrip supply in the market, and that this huge demand is strong enough to outpace rising interest rates. He also said that he believes drastic changes in supply will occur slowly over years and would be easy to detect.

In fact, changes are beginning to unfold in the real estate market. Demand is falling and inventory is increasing. But it remains to be seen how deep and long-lasting these trends will be. with the Federal Reserve signaling their unwillingness to back down on rate hikes With inflation at generational highs, the prospect of continued price growth is not as rosy as it was six months ago.

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