US home prices could plunge by nearly 20% as erratic market activity and rising interest rates drive a “risk of a deep global housing slide,” the Federal Reserve’s own researchers said in a report Tuesday.
Dallas Fed economists pointed to signs of trouble in the US and German housing markets which “pose a vulnerability to the global outlook because of the size of those nations’ economies and significant cross-border financial spillovers.”
The researchers noted “exponential growth in key housing market indicators,” such as home-price-to-rent ratio and real house prices, signs of an affordability crisis.
Price-to-rent ratio compares home prices to the cost of annualized rent.
US home prices would need a 19.5% correction “to bring the US in line with its fundamentals,” researchers Lauren Black and Enrique Martinez-Garcia said in the report.
Additional increases in mortgage rates, which doubled over the last year as the Fed implemented a series of interest rate hikes to tame inflation, could exacerbate the problem.
The average 30-year mortgage rate hit 6.5% last week, up from 3.89% during the same week one year earlier.
“While a modest housing correction remains the baseline scenario, the risk that a tighter-than-expected monetary policy may trigger a more-severe price correction in Germany (and the US) cannot be ignored,” the researchers said.
Any kind of severe correction in the US or German market could have cascading consequences.
“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 U.S. to the global economy,” they added.
Rising interest mortgage rates have triggered a significant slowdown in the US housing market over the last year. Existing-home sales have declined for 12 straight months, according to the National Association of Realtors.
US home prices have declined for six straight months, according to the most recent data from the closely-watched Case-Shiller index.
In a recent note to clients, Goldman Sachs projected that home prices would fall by 6.1% this year on the national level.
The bank estimated that some cities in overheated markets, such as Seattle, San Francisco and Austin, Texas, would experience larger double-digit declines.
Another firm, Pantheon Macroeconomics, has projected a home price plunge of up to 20% during the current correction.
Ex-Brit turned Manhattan resident since 2008.