US house prices could fall by 20% next year if mortgage rates rise

Daryl Fairweather, chief economist at Redfin, discusses the current housing market landscape as reports show homes on ‘Varney & Co.’ sold for less than their asking price.

House prices are already falling at the fastest rate in decades, according to a noted Wall Street economist, as mortgage rates continue to climb, and could fall another 20% next year.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in an analyst note published last week that there is “no bottom in sight” for falling home sales with mortgage rates approaching 7% for the first time since 2001. He expects house prices to rise by 15% to 20% fall next year.

“We expect home sales to continue to decline into early next year,” Shepherdson wrote in the note. “By that point, sales will have fallen to the incompressible minimum level, where the only people moving home are those who have no choice because of their work or family circumstances.”

Existing home sales already fell 1.5% from the previous month in September to an annualized rate of 4.71 million units, according to data released last week by the National Association of Realtors (NAR). On an annual basis, home sales fell by 23.8% last month.


Massachusetts House for Sale in 2020

A for sale sign stands in front of a home on October 6, 2020 in Westwood, Massachusetts. (AP Photo/Steven Senne (AP Photo/Steven Senne, File / AP Newsroom)

Painfully high inflation and rising borrowing costs are proving to be a deadly combination for the housing market, forcing potential buyers to pull out of spending.

Many experts, including Shepherdson, agree that the housing market is now in a recession that will worsen as the Federal Reserve continues to raise interest rates.

“If you’re planning to move and need a new mortgage, you’re going to have to deal with a huge surge in rates,” Shepherdson said. “It’s very possible that even people who want to trade in will get a higher monthly payment. That’s a good reason to sit down, limiting the supply.”

The Federal Reserve is tightening policy at the fastest pace in three decades as it tries to crush runaway inflation. Policymakers voted to approve five consecutive rate hikes this year, including three consecutive 75 basis point hikes in June, July and September.

US housing market

A view of homes in a neighborhood in Los Angeles, California, on July 5, 2022. (Photo by Frederic J. Brown/AFP via Getty Images) ((Photo by FREDERIC J. BROWN/AFP via Getty Images) / Getty Images)

At the end of their meeting last month, Fed Chair Jerome Powell indicated that another 125 basis points in rate hikes are on the table this year.


The rate hikes have already pushed the average interest rate for a 30-year fixed mortgage to 6.94%, according to Freddie Mac — double what they were just a year ago.

Due to rising mortgage rates, the demand for new homes is quickly drying up, causing house prices to fall.

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