Overvalued Housing Market? Here’s How Much Home Prices Could Drop

Overvalued Housing Market? Here’s How Much Home Prices Could Drop

The ongoing housing boom could finally be winding down.


Amid the staggering increases in home prices witnessed across much of the country, many are left wondering: when will this ever end?

In the past two years, home prices have surged well over 30 percent and, according to the latest S&P CoreLogic Case-Shiller national home price index, prices have risen nearly 20 percent in February year-over-year. That figure is up from the 19.1 percent annual increase in January and is the third-highest reading in the index’s thirty-year-plus history.


But, as reported by Fortune, the ongoing housing boom could finally be winding down. In fact, according to Mark Zandi, chief economist at Moody’s Analytics, some of the nation’s most overpriced housing markets could see price reductions of up to 10 percent over the coming year.

“In terms of house prices, I expect (the growth) to go flat … there will be markets where we will see a price decline of around 5 percent to 10 percent,” Zandi said. The economist noted that much of the blame can be placed on the increasingly hawkish policies of the Federal Reserve, which earlier this week green-lighted the biggest interest-rate hike since May 2000.

This, in turn, has driven up mortgage rates that have hit their highest level since 2009. The average rate on the popular thirty-year fixed started this year at 3.29 percent and reached an eye-opening 5.62 percent on Thursday, according to Mortgage News Daily.

There could be even more pain ahead. The recent fifty-basis point hike now puts the key benchmark federal funds rate at a range between 0.75 percent and 1 percent, the highest level since the Covid-19 pandemic started more than two years ago. But current market pricing has the rate eventually climbing to 2.75 percent to 3 percent by the end of the year, according to CME Group data.

In what may be a preview of what’s to come in the U.S. housing market, Bloomberg has reported that home prices in Toronto, Canada, have dropped by the most in two years largely due to higher rates. “The declines are happening as the Bank of Canada embarks on what’s expected to be one of the most aggressive campaigns to raise borrowing costs in the institution’s history,” the news outlet wrote.

The average price of a home in Canada’s biggest city trended lower 6.4 percent in April from the month before on a seasonally adjusted basis, according to the Toronto Regional Real Estate Board. That figure was the largest monthly drop since April 2020.

The Central Bank, since March, has lifted the benchmark interest rate from 0.25 percent to 1 percent. Current market pricing has the rate rising to at least 1.5 percent next month.

“Housing price growth is unsustainably strong in Canada,” Carolyn Rogers, the Bank of Canada’s senior deputy governor, noted earlier this week in a speech. “It would not be a bad thing for the economy, for the growth in housing prices to moderate a bit and we do expect that to happen as rates go up,” she added.

Ethen Kim Lieser is a Washington state-based Finance and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn.

Image: Reuters