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US home prices will drop 'substantially' because demand will 'crater'

In a note to clients on Tuesday, a well-known economist warned that demand from cash-strapped buyers is causing US home prices to be on the verge of a big drop.

A chief economist at Pantheon Macroeconomics, Ian Shepherdson, said that the number of single-family home listings has gone up by 40 percent in the last four months, even though unit sales are going down because prices are so high and mortgage rates are going up.

Based on how things are now, Pantheon's calculations show that US home prices are likely "about 15 to 20 percent overvalued" compared to incomes, which sets the stage for big drops.

"The market is getting used to a new reality in which sales are much lower and there is a lot more inventory. Because of this, prices have to go down, probably quite a lot," Shepherdson said.

Tuesday, data from the Commerce Department showed that sales of new single-family homes dropped by 8.1% in June to 590,000 units. Reuters says that sales have now dropped to their lowest level since 2020.

Shepherdson says that the numbers on new home sales "closely" match the numbers on mortgage applications, which "make it clear that demand is cratering."

Shepherdson also told his clients to "ignore" the latest data from the S&P CoreLogic Case-Shiller National Home Price Index, which showed that prices went up 1 percent from April to May on a national level.

Home for sale
The Federal Reserve is set to hike interest rates again this week.
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The economist pointed out that the Case-Shiller report uses an average over three months and doesn't take into account how quickly the US housing market can change.

"The early spring was a sellers' market, but it turned into a buyers' market almost overnight," Shepherdson said. "The rise in mortgage rates cut a lot of potential buyers' spending power or drove them out of the market altogether."

The Post reported last week that the number of mortgage loan applications recently hit its lowest level in 22 years. This is because people who want to buy a home are facing both rising prices and high interest rates.

As the Federal Reserve raises its benchmark interest rate to slow down the economy, mortgage rates have steadily gone up. On Wednesday, people expect the Fed to raise rates by at least 3/4 of a percentage point.

Pantheon Macroeconomics thinks that the prices of existing single-family homes will have dropped by 0.4% from April to May and by another 1.8% from May to June, when prices are adjusted for the seasons.

Mark Zandi of Moody's Analytics, who is a well-known economist, recently said that rising mortgage rates were about to put the housing market in a "deep freeze."

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