US housing market is in ‘much worse shape’ than Fed is letting on, economist warns

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The U.S. housing market is in significantly worse shape than the Federal Reserve is saying, a top economist has warned – and prices will soon fall sharply. 

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said that the outlook for housing sales is even more grim than the Fed has said, and the ‘worst is yet to come’ for home prices.

He tweeted on Tuesday that he had been ‘bearish as hell about housing for months’ – meaning that he predicted a significant slump in the market.

A bear market is one where prices are falling, and people are selling.  

He attached a graph showing the dramatic downturn, and said: ‘Well, I’m feeling vindicated.’

Sales of new single-family homes hit their lowest level in nearly seven years in July, falling 12.6 percent to a seasonally adjusted annual rate of 511,000.

Ian Shepherdson, chief economist with Pantheon Macroeconomics, said he expected more bad news in the housing market

Ian Shepherdson, chief economist with Pantheon Macroeconomics, said he expected more bad news in the housing market

Sales rose in the Northeast, but decreased in the West and the Midwest as well as the South, which had seen the most explosive demand in recent years.

Sales dropped 29.6 percent on a year-on-year basis in July. 

They peaked at a rate of 993,000 units in January 2021, which was the highest level since the end of 2006.

Shepherdson said that the situation was more dire than the data showed.

‘The housing market is in much worse shape than the Fed has been willing to admit,’ he wrote in a note to clients.

‘But policymakers have made it clear that inflation is their primary objective, and housing is collateral damage.’

The housing inventory is at its highest level since April 2009, as mortgages become more expensive and other financial pressures – high gas prices, soaring costs of groceries – continue to be felt.

Mortgage rates have nearly doubled since January, rising to 5.13 percent for a 30-year loan as of last week, according to Freddie Mac.

The Fed’s effort to bring down inflation by slowing spending has caused a marked slowdown of home sales.

Jerome Powell, the chair of the Federal Reserve, is seen on July 27

Jerome Powell, the chair of the Federal Reserve, is seen on July 27

The Consumer Price Index of inflation was at a 40-year high in June, of 9.1 percent. It fell slightly in July, to 8.5 percent.

But Shepherdson said he expects the prices of new homes will continue to fall.

‘We expect sharp month-to-month declines in new home prices for the foreseeable future,’ he said.

Shepherdson has repeatedly expressed concern about the housing market.

In July, he warned that he expected home prices to plunge ‘substantially’ on ‘cratering’ demand, and said homes were ‘about 15 percent to 20 percent overvalued’ relative to incomes.

Zillow analysis this week showed US home values sank for the first time in a decade in July, declining 0.1 percent compared to the previous month.

After the Fed’s meeting in July, Jerome Powell, the bank’s chairman, said he thought the slump would help people looking to get on the housing ladder.

‘I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset,’ Powell said.

‘We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.’

On Monday, a study published by real estate brokerage Redfin found that a high share of home sellers dropped their asking price in July, particularly in former pandemic boomtowns.

Boise, Idaho, which was a top destination for West Coast remote workers during the pandemic, saw 70 percent of listings slashed in July, up from just a third a year ago.

In Denver, 58 percent of home listings were reduced last month, while 56 percent of listings in Salt Lake City were dropped from the initial asking price.

‘Individual home sellers and builders were both quick to drop their prices early this summer, mostly because they had unrealistic expectations of both price and timelines,’ said Boise Redfin agent Shauna Pendleton.

‘They priced too high because their neighbor’s home sold for an exorbitant price a few months ago, and expected to receive multiple offers the first weekend because they heard stories about that happening,’ she added. 

The 10 cities that saw the biggest share of listing price reductions last month are seen above

The 10 cities that saw the biggest share of listing price reductions last month are seen above

A housing development is seen in Boise, where last month 70% of home listings were slashed below their initial asking price as sellers confronted their 'unreasonable expectations'

A housing development is seen in Boise, where last month 70% of home listings were slashed below their initial asking price as sellers confronted their ‘unreasonable expectations’

‘My advice to sellers is to price their home correctly from the start, accept that the market has slowed and understand that it may take longer than 30 days to sell. If someone is selling a nice home in a desirable neighborhood, they shouldn’t need to drop their price.’

Although industry data shows that home prices remain higher than they were a year ago nationwide and in nearly every market, listing reductions have increased dramatically as sellers’ lofty expectations meet with cold reality. 

Redfin said that the national share of homes for sale with price drops reached a record high in July. 

None of the 97 cities included in the analysis had fewer than 15 percent of home listings that were reduced from their initial asking price.

More than half of the cities with the biggest share of price drops – Boise, Denver, Tacoma, Sacramento, Phoenix, San Diego and Portland – were among the 20 housing markets that cooled fastest in the first half of 2022.

Redfin notes those markets had attracted scores of eager homebuyers during the pandemic, when tech workers and other white collar workers fled more expensive markets and drove home prices up in smaller cities.

In Denver, 58 percent of home listings were reduced last month

In Denver, 58 percent of home listings were reduced last month

Home prices remain solidly strong, with July's national median sales price of $403,800 representing a 10.8% increase from a year ago, and just below the record-high set in June

Home prices remain solidly strong, with July’s national median sales price of $403,800 representing a 10.8% increase from a year ago, and just below the record-high set in June

Now, however, buyers hold the upper hand in a cooling market, and many sellers are having to cut their asking prices in order to close a deal.

The Redfin study found that McAllen, Texas had the lowest share of listing reductions in July, with just 15.7 percent of listings dropped – though that was still more than the 11.7 percent rate seen a year ago.

In a notable exception to the trend, several markets in northern Illinois saw lower shares of price cuts in July than a year ago, indicated that the housing market in Chicago is gaining steam.

Chicago and nearby Elgin and Lake County, Illinois, all saw lower rates of price drops than they did a year ago. 

Though home transactions declined, prices remain solidly strong, with July's national median sales price of $403,800 representing a 10.8 percent increase from a year ago

Though home transactions declined, prices remain solidly strong, with July’s national median sales price of $403,800 representing a 10.8 percent increase from a year ago

The average rate for a 30-year fixed mortgage stood at 5.13 percent this week

The average rate for a 30-year fixed mortgage stood at 5.13 percent this week

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