Housing market in the United States headed for major slowdown

U.S. home prices are finally falling from record highs notched earlier this year, and they are likely to see even steeper declines in coming months as the Federal Reserve ratchets up its fight against inflation.

Prices are already posting the most significant monthly declines since the 2009 housing crash, according to a new release from Black Knight Data & Analytics. Median home prices tumbled 0.98% in August from a month earlier, following a 1.05% drop in July. In total, median home prices are down 2% since their June peak.

"Together, they represent two straight months of significant pullbacks after more than two years of record-breaking growth," said Black Knight President Ben Graboske.

Recent outlooks from major Wall Street firms suggest this is just the beginning of what's likely to be a sharp plunge in U.S. home prices.

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Morgan Stanley anticipates that home prices could tumble another 7% by the end of 2023. While that's smaller than the 27% decline seen when the mortgage bubble burst more than a decade ago, it would still mark the second-fastest decline since the Great Depression.

The investment bank blamed rapidly spiking mortgage rates for the expected decline.

Mortgage rates have more than doubled to 6.29%, according to recent data from mortgage lender Freddie Mac, and are likely to march even higher, with some forecasters bracing for rates as high as 7%. And while home price growth has cooled over the past month, prices remain well above where they were just one year ago, putting affordability out of reach for many prospective buyers.

"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," the Morgan Stanley researchers wrote.

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The Federal Reserve has sent the once red-hot housing sector into the midst of a severe correction with its aggressive rate hike plan as it tries to crush runaway inflation.

The U.S. central bank raised its benchmark interest rate by 75 basis points for the third straight month in September, following similar rate hikes in June and July — the most aggressive series of increases since 1994. The move puts the key benchmark federal funds rate at a range of 3% to 3.25%, the highest since the 2008 financial crisis. It also marks the fifth consecutive rate increase this year.

In addition to the large rate hike, Fed officials laid out an aggressive path of rate increases for the remainder of the year. Recent economic projections show that policymakers expect interest rates to hit 4.4% by the end of the year, suggesting that another three-quarter percentage point increase is on the table.

Meanwhile, Goldman Sachs strategists predicted home prices could fall 5% to 10% due to recent weakness in the market.

"It now appears house prices are falling even though inventory levels are still historically fairly low (by measures of active inventory or months of supply)," the bank said.

That sentiment was echoed by Moody's chief economist Mark Zandi, who sees home prices — peak to trough — falling 5% to 10%, even if the economy averts a recession. If the economy slides into a recession, however, Zandi expects the decline to be even steeper at 10% to 15%, though he's optimistic the sector will avoid a 2008-esque crash.

Federal Reserve Chairman Jerome Powell has warned that the housing market is likely to suffer due to policymakers' interest-rate hikes — something he has called a "good thing."

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"We’ve had a time of a red-hot housing market all over the country," Powell said in September. "The deceleration in housing prices that we’re seeing should help bring prices more in line with rents and other housing-market fundamentals. And that’s a good thing."