John Scott Unlock Staff Writer

Key Takeaways:

  • The home buying market, recently at a frenzy, is starting a cool down that could be historic.

  • Inflation, the actions of the Fed and interest rates are combining to cause the price drop.

  • The volatility in the market shows no sign of calming down.

National home price drops don’t happen very often. We saw home values fall in the early 80s and the early 90s, again after the volatile Great recession in the mid-2000s. And even then, the price slides were in the single digits.

U.S. home prices had climbed an astonishing 43% in the past two years, but dark clouds are forming. Numerous experts are predicting we’re entering a phase where home values will be in a decline not seen since the Great Depression of the 1930s.

What’s to blame? inflation, the Fed, and interest rates.

After years of rock-bottom rates, it’s safe to assume we’ll soon see mortgage rates at 7%. Combine that with artificially high prices, and you’ve got a situation where millions cannot afford to buy a home.

Here’s the outlook from Goldman Sachs:

Our G10 home price model suggests sizable nominal home prices declines from the peak of around 15% in Canada, 5-10% in the US, and under 5% in the UK. We view the risks to these estimates as tilted to the downside.

The graph below shows what’s underway.

A graph showing the trend of US home prices.

Buyers are becoming increasingly shy about making offers with interest rates on the rise. A 1-point hike in rates may sound “small, but here’s what that point does to a monthly mortgage payment:

Here’s an example from Money magazine:

If you bought a $250,000 home and made a 20% down payment — $50,000 — you would end up with a starting loan balance of $200,000. On a $200,000 home loan with a fixed rate for 30 years:

  • At 3% interest rate = $843 in monthly payments (not including taxes, insurance, or HOA fees)

  • At 4% interest rate = $955 in monthly payments (not including taxes, insurance, or HOA fees)

  • At 6% interest rate = $1,199 in monthly payments (not including taxes, insurance, or HOA fees)

  • At 8% interest rate = $1,468 in monthly payments (not including taxes, insurance, or HOA fees)

The Federal Reserve Board of Governors (the people who run the “bank” of the nation) are scheduled to meet November 2nd, and Chair Jerome Powell has signaled another rate hike is coming.

How the price drop will affect your home’s value

Here’s where there’s a bit of a silver lining. Because US home prices soared over the last two years, the expected drops in value will still likely put your home at 2020 levels, which is to say you’d still be “up” from, say, 4 or 5 years ago.

The rapid shift to working at home during the pandemic caused a massive spike in home remodeling, which added value to them and helped push prices to sky-high levels. And now gravity is taking hold and will push them down during this correction.

We’re participating in one wild, unpredictable, expensive, and unfortunate economic rollercoaster ride. Price increases due to inflation are putting pressure on many households to make ends meet. Interest rates will likely rise more. There will be many more headlines over the coming weeks and months devoted to our volatile economy.

We’ll be watching. We’ll share what we find out.

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