US home prices could fall by nearly 20% as uncertain market activity and rising interest rates run “the risk of a deeper global housing slide,” the Federal Reserve’s own researchers said in a report on Tuesday.
Dallas Fed economists pointed to signs of trouble in the US and German housing markets, which “pose a vulnerability to the global outlook due to the size of those countries’ economies and significant cross-border financial spillovers.”
The researchers noted “exponential growth in key housing market indicators,” such as the home-price-to-rent ratio and real home prices, as signs of an affordability crisis.
The price-to-rent ratio compares home prices to annual rent costs.
Researchers Lauren Black and Enrique Martinez-Garcia said US home prices would need a 19.5% correction “to bring the US back in line with its fundamentals.” said in the report.
Additional increases in mortgage rates, which doubled over the past year as the Fed implemented a series of interest rate hikes to control inflation, could exacerbate the problem.
The average 30-year mortgage rate hit 6.5% last week, up from 3.89% during the same week a year ago.
“While a modest housing correction remains the baseline scenario, the risk that relatively tighter monetary policy in Germany (and the US) could trigger a more severe price correction cannot be ignored,” the researchers said.
Any serious correction in the US or German market could have cascading consequences.
“The potential for a domino effect, where investors move out of international housing in search of safety and liquidity elsewhere, also raises concerns of spillovers into the global economy beyond Germany or the US,” he added.
Rising interest mortgage rates have led to a significant downturn in the US housing market over the past year. According to the National Association of Realtors, existing home sales have declined for 12 consecutive months.
US home prices have declined for six months in a row, according to the most recent data from the closely watched Case-Shiller index.
In a recent note to clients, Goldman Sachs estimated House prices will fall by 6.1% National level this year.
The bank estimates that some cities in hot markets, such as Seattle, San Francisco and Austin, Texas, will experience large double-digit declines.
Another firm, Pantheon Macroeconomics, forecasts house prices to decline by up to 20% during the current correction.