(DCWatchdog.com) – Housing market prices in the United States could collapse by almost 20%, the Dallas office of the Federal Reserve warned in a new report.
The Dallas Fed’s report this week points out that the global housing market might present a bubble that risks a correction.
It also notes that, at the same time, the real estate market in America would be more aligned “with fundamentals” if home prices were to decline by 19.5%, thus making properties more affordable.
The report’s authors, Lauren Black and Enrique Martinez-Garcia, emphasize the importance of a potential market correction due to a current affordability crisis.
They also noted the “frothy” state of the global housing market since 2020 due to a boom experience during the COVID-19 pandemic.
Thus, even though there are indications that home-price growth is easing, the Dallas Fed economists still find a risk of a “deep slide.”
The report compares the housing markets in the United States and Germany to emphasize their concerns over the house-price-to-rent ratios, which measure housing’s profitability as an investment opportunity.
“[I]f the observed price-to-rent ratio grows at an explosive rate relative to its fundamental-based ratio estimated with long-term interest rate and rent growth data, the bubble hypothesis merits attention,” the report authors wrote, as cited by Business Insider.
They point out that the current “erratic market activity” in the US and Germany, coupled with rising interest rates and rising mortgage rates, is increasing the “risk of a deep global housing slide,” the economists warned.
The economists also warn that more risks are looming for the housing market if the Federal Reserve switches to a more restrictive monetary policy.
The report says the price-to-rent ratio in the United States started to decline in the third quarter of 2022 because the cooling of prices surpassed the cooling of rents.
Even though the authors consider the baseline scenario a “modest housing correction,” they still warned that a hawkish monetary policy could bring about a steeper one.
“The possibility of a domino effect, where investors pull out of international housing seeking safety and liquidity elsewhere, also raises concerns of spillovers beyond Germany or the US to the global economy,” Black and Martínez-García noted.
Data from Case-Shiller and the National Association of Realtors have shown that US home prices have declined for six consecutive months, and so have existing-home sales.
Meanwhile, 30-year mortgages topped 7% in October, presently standing at 6.62%.
Home prices presently find themselves 4.1% lower than the peak they reached in June peak. Moreover, a Goldman Sachs prognosis predicts a decline of another 6.1% throughout 2023, Newsmax reports.
The global housing market could be a bubble in danger of a correction, and U.S. home prices alone could drop by 19.5%, economists at the Dallas Federal Reserve warn. https://t.co/uYi9pYjoZp
— NEWSMAX (@NEWSMAX) March 1, 2023