Nearly Everyone Just Revised Their Home Price Forecasts

Two-decade high mortgage rates are already beginning to wreak havoc on the housing market. Mortgage applications fell 13% the last week of September, a sharp decline that coincided with the first weekly mortgage rate above 7% since 2002.

While 7% rates are not abnormally high when viewed through the lens of historical mortgage rates, viewing the current rates from only this perspective overlooks the enormous impact that currents rates are having on an already significantly overvalued housing market, which combined have resulted in the highest monthly payments in history. Even when adjusting for income and inflation, it’s more expensive to buy a home now than at any other point in the past.

The tangible impact of this pressurized affordability is increasing rapidly, and as new market data becomes available, it’s forcing economists to downgrade their housing market outlooks on almost a daily basis at this point.

Today, Moody’s Analytics revised their outlook once again. As recently as August, Moody’s forecasted that nationally home prices would fall 0% to 5%, and then downgraded their forecast just last month to a 5% to 10% national decline. Fast forward just a few weeks and Moody’s is now forecasting a peak-to-trough decline in prices of 10%.

Also this week, Morgan Stanley revised their forecast, with the financial giant now projecting a national price decline of 7%, citing rapidly rising mortgage rates as the rationale or their revised outlook.

Likewise, Goldman Sachs is now forecasting a 5% to 10% decline in prices nationally, citing weakness in the market.

“It now appears house prices are falling even though inventory levels are still historically fairly low,” the bank said.

Fed Chairman Jerome Powell has already warned us that the housing market is likely to suffer due to the Fed’s interest rate hikes, going so far as to outright admit that the Fed is willing to sacrifice the housing market if it helps the fulfill their mandate of handling inflation.

But there is a HUGE caveat in all of these forecasts…

These forecasts assume that the U.S. manages to avoid a recession, which by all measures, the U.S. economy has already met the technical definition of. According to the general definition—two consecutive quarters of negative gross domestic product (GDP)—the U.S. entered a recession in the summer of 2022.

Moody’s Analytics is the only major player showing their hand at the moment regarding home price forecasts in the event of a recession, and the numbers are grim. Should a recession fully manifest, Moody’s now forecasts a peak-to-trough decline of 15% to 20% nationally. Such a retraction in home prices would mark the one of the largest price drops in history, second only the 27% home price decline which occurred between 2006 and 2012.

In markets which meet the definition of being significantly overvalued, Moody’s now forecasts that home price will fall 15% to 20% and if a recession hits, their forecast jumps to a staggering decline of 25% to 30% in these markets.

Keep in mind, these significantly overvalued markets are not isolated areas of the country. In fact, they are all over the place. 210 of the 400 regional markets that Moody’s tracks meet the criteria for being considered significantly overvalued. In 2019, there were just 3 markets that met this criteria.

Make no mistake, the bearish outlook about the housing market in recent weeks is not tied solely to 7% interest rates last week. Rather, the revisions we are seeing today are the result of financial markets signaling that 6-7%+ rates are going to be with us for longer than initially expected. Because of the immense downward pressure these rates will apply to the housing market, so long as they remain prices must correct in order to compensate.

Why the sudden flurry of revisions?

Many were holding out hope that the September housing data would bring good news. Unfortunately, the data did little to quell their anxiety, with most metrics for the month posting third and fourth consecutive months of trajectory. The September Weld County Market Stats show similar trends, with prices now 4.2% below the peak in May.

Given all that, combined with the realization that higher rates are here to stay for longer than first expected, a looming recession, and a failure to bring inflation down at a faster rate, the need to revise these forecasts became necessary.

Rest assured, I am sure that these revisions will be the first of many we see in the near future.