U.S. housing market to see the second-biggest home price decline since the Great Depression

By Published On: October 3rd, 20224.9 min read
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June 2024

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National home price declines are uncommon, but it does occur on occasion. It happened in the early 1980s, then again in the early 1990s, and most notably in the years following the 2008 housing crash. That said, sharp home price declines are incredibly rare: Only the Great Depression and the Great Recession saw nationwide home prices fall in the double-digits range.

That history—or lack of history—is why recent outlooks published by Wall Street titans are raising eyebrows. Not only is there a building consensus on Wall Street that we’ve entered into a period of falling home prices, but there’s also a consensus it will be the second-sharpest home price decline since the Great Depression.

Let’s take a look at where financial giants expect U.S. home prices to head next.

Morgan Stanley: U.S. home prices to fall 7%

Last week, Morgan Stanley finally joined the housing bear crowd. Heading forward, the investment bank now expects U.S. home prices to fall 7% by the end of 2023. On one hand, that’s far smaller than the 27% peak-to-trough decline the country experienced between 2006 and 2012. On the other hand, it’s twice as large as the 3.1% peak-to-trough decline posted in the early ’90s. In fact, if Morgan Stanley’s forecast comes to fruition, it would mark the second-sharpest drop since the Great Depression.

The culprit? Spiking mortgage rates, coupled with unprecedented home price growth, has put affordability into the upper bounds of history.

“If we assume a 7% mortgage rate, affordability looks materially worse than today. And the pace of its deceleration has already more than doubled compared to almost any time in history,” writes Morgan Stanley researchers. “The positive takeaway—which we think puts the magnitude of this [7% forecasted home price] drop into perspective—is that this decrease would only bring home prices back to where they were in January 2022. That is still 32% above where home prices were in March 2020.”

Keep in mind that a 7% decline is Morgan Stanley’s “base case” forecast. The investment bank also issued a “bull case” and a “bear case.” If mortgage rates come back down to earth by next spring (i.e., Morgan Stanley’s bull case), U.S. home prices could climb 5% in 2023. Conversely, if the country slips into a recession (i.e., Morgan Stanley’s bear case), the national home price decline could exceed 10%.

“Affordability is already challenged, exposing would-be homeowners to an increasing rent environment that erodes their ability to save for a down payment. If that were to be combined with increasing unemployment, we could imagine a scenario in which existing home sales continue to outpace the GFC to the downside,” writes Morgan Stanley researchers, referring to the Great Financial Crisis.

Goldman Sachs: U.S. home prices to fall 5% to 10%

As weakening housing data trickled in this summer, Goldman Sachs affirmed its positive home price outlook for 2023. Well, that was until it caved last week.

Peak-to-trough, Goldman Sachs now expects U.S. home prices to fall 5% to 10%. That’s a sharp downward revision from last month, when the investment bank predicted that U.S. home prices would rise 1.8% in 2023.

“We view the risks to these estimates as tilted to the downside because of a sharp deterioration in our descriptive home price outlook scores and evidence of strong mean reversion in regional data,” write Goldman Sachs researchers.

Simply put: Goldman Sachs acknowledges its 2023 outlook might still be on the conservative side.

Good mortgage underwriting. Plain vanilla lending. Record low vacancy rate. That’s why Moody’s chief economist Mark Zandi says we aren’t heading for a 2008-style housing crash. However, Zandi says improved lending practices and tight housing supply won’t be enough to prevent the ongoing home price correction. The fundamentals, he says, are simply too detached from reality.

Peak-to-trough, Moody’s Analytics expects U.S. home prices to fall 5% to 10% even if a recession doesn’t come to pass. If the country slips into an economic downturn, Moody’s Analytics predicts U.S. home prices would fall by 10% to 15%. Either way, Zandi says, it will likely take 12 to 18 months for prices to bottom out.

When a group like Moody’s Analytics or Goldman Sachs says the “U.S. housing market” or “U.S. home prices,” they’re talking about an aggregated view of the country. On a regional level, those results are going to vary. The ongoing home price correction won’t be an exception.

Every quarter, Moody’s Analytics assesses whether local fundamentals, including local income levels, can support local home values. If a regional housing market is “overvalued” by more than 25%, Moody’s Analytics deems it “significantly overvalued.” Through the second quarter of the year, 210 of the nation’s 413 largest regional housing markets fell into the “significantly overvalued” camp.

Heading forward, Moody’s Analytics predicts that “significantly overvalued” housing markets should see home price declines between 10% and 15%. If a recession hits, Moody’s Analytics expects those home price declines to widen to 20% to 25% in “significantly overvalued” housing markets.

A few weeks back, Fitch Ratings finally gave its housing outlook. The Big Three credit rating agency is clearly on the bearish side.

“The likelihood of a severe downturn in U.S. housing has increased; however, our rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023, and further pressure in 2024,” wrote Fitch Ratings researchers on Tuesday. “Although we recently affirmed the ratings and Stable Outlooks for our U.S. homebuilder portfolio, ratings could face pressure under a more pronounced downturn scenario that would likely include housing activity falling roughly 30% or more over a multiyear period, and 10% to 15% declines in home prices.”

Of course, if home prices actually drop 10% to 15%, Fortune might rebrand the Pandemic Housing Boom. The Pandemic Housing Bubble sounds more fitting.

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