US Federal Reserve's Pessimistic Outlook: Home Prices Could Fall 20% Due to Interest Rate Burden

30-Year Fixed Mortgage Rates in the 7% Range... Highest Level in 20 Years
House Prices Soaring Due to Ample Liquidity, May Drop 15-20% Amid Demand Decline

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[Asia Economy Reporter Yoon Seul-gi] The U.S. Federal Reserve (Fed) has projected that U.S. home prices could fall by as much as 20%. Following the Fed's rapid interest rate hikes, the 30-year fixed mortgage rate in the U.S. has surpassed the 7% mark, and the burden of higher rates is reducing housing demand, potentially leading to further declines in home prices.

According to Bloomberg on the 15th (local time), Enrie Martinez-Garcia, senior economist at the Federal Reserve Bank of Dallas, analyzed that housing prices adjusted for inflation have experienced the steepest rise since the 1970s during the COVID-19 pandemic.

U.S. home prices rose 94.5% in the second quarter of 2022 compared to the first quarter of 2013, a decade earlier. Even after accounting for inflation, this represents a 60.8% increase. The upward trend in home prices became more pronounced after the COVID-19 pandemic in 2022, with about 40% of the price increase over the past decade occurring between the first quarter of 2020 and the second quarter of 2022.

The surge in housing demand during the pandemic, coupled with a shortage of supply, has been identified as the main driver behind rising home prices. The U.S. government maintained expansionary fiscal policies and ultra-low interest rates to overcome COVID-19, which increased consumer demand for housing. However, global supply chain instability and lockdowns due to COVID-19 raised labor and construction material costs, negatively impacting housing supply. Additionally, FOMO (fear of missing out) among buyers contributed to a housing price bubble.

However, to curb inflation, the Fed implemented four consecutive 0.75 percentage point interest rate hikes this year. Mortgage rates also exceeded 7% last month, reaching the highest level in 20 years.

Martinez-Garcia forecasted, "In a pessimistic scenario, current home prices could retreat by 15-20%, and real consumer spending adjusted for inflation could decrease by 0.5-0.7%." He added that as total spending declines, housing demand will further decrease, creating a vicious cycle of falling home prices.

With already high interest rates increasing household burdens, mortgage applications have sharply declined, and home sales have decreased. The proportion of mortgage principal and interest payments relative to disposable personal income is estimated to exceed 6% by the end of this third quarter, higher than the record low of 3.9% in the second quarter.

Consequently, there are views that the Fed's soft landing scenario?lowering inflation while avoiding a recession?will be difficult to achieve. Martinez-Garcia explained that under the ongoing monetary tightening stance in the U.S., the burden of mortgage repayments and the possibility of a severe correction in home prices could increase.

This content was produced with the assistance of AI translation services.