Home prices could fall 20% by next year as mortgage rates hammer market: economist

US home prices could plunge as much as 20% within the next year as soaring mortgage rates bring the housing market to a standstill, a prominent economist said Thursday.

Existing-home sales declined for the eighth consecutive month in September, falling 1.5% month-over-month to an adjusted annual rate of 4.71 million, according to the National Association of Realtors. The slump is the longest since 2007. Sales are down nearly 24% compared to one year ago.

With mortgage rates surging toward 7%, there is still “no floor in sight” for declining home sales, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics. Shepherdson expects home prices to fall by 15% to 20% over the next year due to cratering demand.

“If you’re planning to move homes and will need a new mortgage, you will face a huge increase in rates,” Shepherdson said in a note to clients. “It’s entirely possible that even people who want to trade down will face a bigger monthly payment; that’s a good reason to stay put, thereby constraining supply.”  

“But prices have to fall substantially in order to restore equilibrium; the supply curve for housing is not flat, so the plunge in demand will drive prices down,” he added.”

Mortgage rates have hampered affordability for prospective buyers who already faced the dual crunch of decades-high inflation and high prices that spiked to record levels during a pandemic-era housing boom. The market has cooled considerably as the affordability crunch drives more buyers and sellers to the sidelines.

The average rate of a 30-year fixed mortgage was 6.94% as of Thursday, according to the latest data from Freddie Mac. Mortgage rates are at their highest since 2002 and have more than doubled since January.

Pantheon expects home sales to decline through early next year as mortgage applications plummet in response to the higher rates.

“By that point, sales will have fallen to the incompressible minimum level, where the only people moving home are those with no choice due to job or family circumstances,” Shepherdson added.

The median existing-home price was $384,800 in September, up 8.4% compared to the same month one year earlier, according to the National Association of Realtors. However, the median price has declined for three straight months since peaking at a record high of $413,800 in June.

As The Post reported, real estate firm Redfin said US home sales and new listings fell to fresh lows last month. One of the firm’s analysts warned the market is “going to get worse before it gets better” due to rising mortgage rates.