Ian Shepherdson, a well-known economist in the U.S and the founder and chief economist of Pantheon Macroeconomics, has predicted a potential 15% decrease in home prices this year. In a recent analyst note, he explained that the decline in home prices is expected to accelerate in 2023 due to factors such as low affordability and increasing inventory.
According to Shepherdson, single-family home prices have already decreased by 5.4% from their peak in May 2022. However, he estimates that prices still need to decrease by approximately 15% more before returning to their long-term average in comparison to disposable incomes. This prediction was shared in a recent note to clients.
Ian Shepherdson, the well-known economist who accurately predicted the mid-2000s housing bubble and subsequent recession thinks home prices may still have further to fall despite the recent improvement in consumer demand. As mortgage rates decrease from a record high, home prices have been rebounding, however, Shepherdson believes that prices have a ways to go before hitting bottom.
During the COVID-19 pandemic, home prices rose at a rapid pace, surpassing levels seen since the 1970s due to low mortgage rates. The demand for homes was strong, particularly among homebuyers seeking more space and with access to stimulus cash. This resulted in a shortage of inventory and caused some buyers to waive home inspections and appraisals or pay high prices above the asking price.
Despite this recent trend, Shepherdson remains cautious about the future of home prices and believes that prices will continue to decline before hitting bottom.
The housing market was thriving during the COVID-19 pandemic with low mortgage rates and high demand for homes. However, the Federal Reserve’s effort to curb inflation by embarking on an aggressive interest-rate hike campaign put a halt to this. Over the course of 2022, the benchmark federal funds rate was increased seven times, resulting in more than a doubling of mortgage rates. This made homes less affordable and led to a decline in home sales and prices from record highs. Despite this, there have been early indications that demand is returning as mortgage rates continue to fall. According to data from Freddie Mac, the average rate for a 30-year fixed mortgage dropped to 6.09% last week. While this is still higher compared to a year ago when rates were around 3.56%, it shows that there is a shift in the market towards more affordable rates.
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