US housing market ‘in much worse shape’ than Fed admits: economist

The Federal Reserve’s policy tightening has sent the US housing market into a slump – and policymakers have yet to fully recognize the scale of the problems, according to a leading economist.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, provided a bearish outlook for homeowners after federal data showed sales of new single-family homes bottomed in almost seven years in July.

Sales fell 12.6% to a seasonally adjusted annual rate of 511,000, well below consensus expectations.

“The housing market is in much worse shape than the Fed has been willing to admit,” Shepherdson said in a note to clients. “But policymakers have made it clear that inflation is their primary objective and housing is collateral damage.”

After booming during the COVID-19 pandemic, the housing market has cooled in recent months as the Fed hiked interest rates in a bid to keep inflation under control. The Fed’s efforts to cool spending and slow demand in the economy caused a noticeable slowdown in home sales and lower prices.

Mortgage rates have nearly doubled since January, hitting 5.13% for a 30-year loan last week, according to Freddie Mac. But rates have actually fallen slightly since they topped 5.8% in June, as fears grow that Fed actions could trigger a recession.

While new home sales have dipped below pre-pandemic levels, slowing house prices and the recent drop in mortgage rates suggest “the steepest declines in sales are behind us,” according to Shepherdson.

Fed Chairman Jerome Powell
Fed Chairman Jerome Powell recently acknowledged that the housing market needs a “reset”.
Xinhua News Agency via Getty Ima
Economist Ian Shepherdson said the housing market is
Economist Ian Shepherdson said the housing market is “collateral damage” as the Fed raises rates.

At the same time, he warned that “the worst is yet to come” for house prices. Housing inventory has risen to its highest level since April 2009 even as demand plummets due to affordability issues, according to Shepherdson.

“We expect sharp month-over-month declines in new home prices for the foreseeable future,” he said.

Fed Chairman Jerome Powell recognized rapidly changing conditions in the housing market following the bank meeting in July. At the time, he suggested a cooldown would ultimately come in handy for potential buyers who struggled to find a home during the pandemic-era boom.

“I would say if you’re a homebuyer, someone, 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 inflation is low again and mortgage rates are low again.”

Fed Chairman Jerome Powell
The Fed’s policy tightening weighed on the real estate market.
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Minutes from the Federal Open Market Committee meeting last month also touched on the issue and underscored a realization among policymakers that housing conditions have eased.

Officials said “housing activity has weakened significantly” and predicted “the slowdown in housing activity will continue.”

As reported by The PostZillow analysis this week showed US home values ​​fell for the first time in a decade in July, down 0.1% from the previous month.

Shepherdson has repeatedly expressed bearish views on the state of the housing market in recent months. In July, he warned that he expected real estate prices fall “substantially” at the request of “craterization”.

At the time, he predicted house prices were “about 15-20% overvalued” relative to incomes.

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