Economist who called a housing bubble warns of an imminent market rollover

  • According to economist Ian Shepherdson, the red-hot US housing market may finally be cooling down.
  • In recent notes, the founder of Pantheon Macroeconomics laid out data pointing to a market slowdown.
  • He said the slowdown is at an early stage and will unfold in the coming months.

After a remarkable two-year heatwave, it seems the US housing market may finally be starting to see something resembling a balance between buyers and sellers.

But according to Ian Shepherdson, founder and chief US economist at Pantheon Macroeconomics, the recent rise in mortgage rates was like pouring a bucket of cold water onto a still scorchingly hot market.

According to the Census Bureau and the Department of Housing and Urban Development, average home prices in the US have increased by as much as 27.4% since the second quarter of 2020. By the end of 2021, however, prices had fallen for the first time since early 2020. In notes to clients last week, Shepherdson explained why the pace of US home price growth will slow sharply.

The most important factor is twofold: falling demand and rising interest rates. the

federal reserve

hiked rates for the first time since 2018 at their March meeting and are expected to hike several more times in 2022 as inflation remains at four-decade highs. This trend will continue to push up mortgage rates as well as other consumer-oriented borrowing costs.

As mortgage costs have already started to rise, demand for new loans and refinancing has fallen for three straight months, according to the Mortgage Bankers Association Purchase Index.

“The housing market is in the early stages of a significant slowdown in activity that will trigger a sharp decline in the rate of home price growth, perhaps beginning as early as the spring,” Shepherdson said in a report last week.

“The average 30-year mortgage rate has increased by about 125 basis points since last September, which has increased the monthly payment on a home mortgage by $412, or 27% per month, at the average price,” he said. “That’s a huge increase, even for households sitting on savings accumulated during the pandemic – a one-off increase in savings can’t fund an increase in mortgage payments for the next 30 years – and demand will fall quite a bit further.” “

mortgage payments

Pantheon Macroeconomics

The falling demand will also affect the housing supply. Shepherdson, who was one of several prominent economists and analysts who predicted the subprime mortgage crisis and housing crash of 2007-2008, pointed out that existing home sales are beginning to decline, which is helping to reduce the supply of homes on the market to increase.

He predicts that existing home sales are likely to fall further in the coming months, giving the overheated housing market much-needed inventory. He believes sales will drop to 4.5 million by the end of this summer – a stark contrast to the roughly 6 million existing homes that were sold last February.

New home sales are also starting to fall — a trend Shepherdson says will continue — which is also helping to expand supply.

And it’s this combination of rising mortgage rates, falling demand and rising inventories that is beginning to dampen price growth, Shepherdson said.

The chart below shows the six-month trailing average of how many monthly home listings are on the market (green line, left axis). The monthly supply indicates how many months the housing stock is on the market, considering how many apartments come off the market on average per month. Trailing median new home price growth (black line, right axis), which has tended to follow supply patterns since at least 2005, is also shown.

housing supply and price

Pantheon Macroeconomics

“Prices have been rising much faster than inventory numbers suggest lately, perhaps because inventory shortages in existing homes have increased demand for new homes, but our second chart shows they are beginning to correct. This process has much more to go on,” he added in an email to customers on Wednesday, referring to the chart above.

Rental growth is also expected to ease next year, he said.

Several other notable real estate market experts have also recently published research or made comments consistent with Shepherdson’s forecast.

Scott Brean, head of fixed income strategy at Brean Capital, said on Wednesday that he expects price growth to “flatten out” later this year, falling to around 4-8% growth. According to the S&P/Case-Shiller US National Home Price Index, home prices have risen 19.2% over the past year.

Desmond Lachman, a senior fellow at the American Enterprise Institute and a former associate director of the International Monetary Fund, recently told Insider that even if demand continues to exceed supply in the market, rising interest rates will weigh heavily on house prices. This is because higher mortgage rates directly affect a borrower’s purchasing power by lowering the overall home price that buyers can realistically afford.

“Interest rates are pretty critical,” Lachman said in February. “You may have underlying factors in housing like population and household composition – fundamentals may look good on that side – but if you have a pretty big rise in interest rates and a pretty deep one


Your home prices will go down.”

Ivy Zelman, the founder of research firm Zelman & Associates and a former Credit Suisse analyst, recently said on the BiggerPockets podcast that she expects the housing market to be hit by an inventory rush as overbuilds and supply chain issues are eventually resolved .

However, others are still bullish on the market. BiggerPockets podcast host and mortgage lender David Greene told Insiders in early March that the biggest gains in the housing market were yet to come.

“Prices will continue to rise. I think they’re going to grow faster than we can handle them,” Greene said. “I think this spring will be one of the busiest and toughest home buying seasons we’ve seen in my life.”

He said this is because demand for mortgages at his firm continues to far outstrip supply in the market and that this large demand is strong enough to overcome rising interest rates. He also said he believes drastic changes in supply would happen slowly over years and be easy to spot.

The real estate market is actually beginning to change. Demand falls and inventories rise. But how deep and lasting these trends will be remains to be seen. With the Fed signaling that it is not ready to back down from rate hikes as inflation is at generational highs, the prospects for continued price growth are not as rosy as they were six months ago.

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