According to a report by the Federal Reserve’s researchers on Tuesday, the US housing market shows signs of vulnerability due to erratic market activity and rising interest rates. The report highlighted that the US and German housing markets are significant enough to pose a risk to the global outlook due to the size of their economies and cross-border financial spillovers. The exponential growth in key housing markets indicators, such as the home-price-to-rent ratio and real house prices, has shown signs of an affordability crisis.
The researchers recommended a 19.5% correction in US home prices to align with the fundamentals. Any additional increases in mortgage rates could exacerbate the problem, leading to a more severe price correction in the US and German markets. This could have cascading consequences as investors pull out of international housing seeking safety and liquidity elsewhere.
Goldman Sachs estimated that home prices would fall by 6.1% nationally this year, with some overheated markets such as Seattle, San Francisco, and Austin experiencing larger double-digit declines. Another firm, Pantheon Macroeconomics, projected a home price plunge of up to 20% during the current correction.
In the US, rising interest mortgage rates have triggered a significant housing market slowdown over the last year. According to the National Association of Realtors, existing-home sales have declined for 12 straight months, while the most recent data from the Case-Shiller index showed that US home prices have declined for six straight months.