The chief economist said the US housing recession has arrived and could lead to a 20% drop in home prices and a cut in federal interest rates by 2023.

Foreclosure home sign.

Foreclosure home sign.Reuters

  • The recession in the US market has already arrived with rising mortgage rates, according to ING chief economist James Knightley.

  • Demand for mortgages is down 30% year-to-date and sales transactions are starting to slow.

  • “A housing downturn will dampen the growth story in the US, but it is also important to remember that it will also reduce inflation,” Knightley said.

A recession in the US housing market has already arrived as potential homebuyers are turning away from deals due to rising mortgage rates, according to ING chief economist James Knightley.

In a Wednesday note to clients, he also said lower home prices could provide some relief from inflation and the Fed’s tightening cycle.

Nightly Highlights Mortgage rates are close to 7%. It led to a sharp drop in the demand for homes due to affordability being “extended to the limit”.

High mortgage rates, which have doubled over the past year, mean the typical monthly payment has risen to $2,600 a month from $1,550 just a few months ago.

“On an annual basis, this equates to 43% of median household income before taxes. From a benchmark perspective, typical new annual mortgage payments to purchase a home equate to 26% of median income in the fourth quarter of 2019 and 37% in the fourth quarter of 2019 and 37% in : “The height of the housing bubble was in 2006.”

Mortgage Applications On Hold About 30% year-to-date and home sales are starting to show signs of slowing. At the same time, the supply of new homes for sale is likely to rise as the number of new homes and building permits rise to a 16-year high at the start of the year.

A combination of lower demand and higher supply means that home prices are likely to fall significantly. In fact, the latest data from the Case-Shiller Index showed that Annual house price growth slowed at fastest pace ever in JulySome of the hottest markets saw monthly declines.

“We’ve seen one monthly drop in home prices, but with more supply in the market at a time when demand is falling rapidly, that means prices are going down even more,” Knightley said.

He estimated that home valuations appear to be extended based on the ratio of existing home prices to median household income that house prices should fall by 20% From peak to trough, the ratio returns to its long-term average.

But don’t expect an imminent downturn in the housing sector to mirror what happened during the 2008 global financial crisis, the note said.

That’s because household balance sheets are in good shape, with household assets doubling to $163 trillion since their pre-2008 peak. Meanwhile, household liabilities rose only $5 trillion to $19 trillion over the same time period. Furthermore, the percentage of homeowners’ ownership in their property stands at the highest level since 1983 at 70.5%.

“With financial regulations tightening significantly since the global financial crisis, the risks of catastrophic loan losses and significant stresses on the US financial system, even under the 20%+ price fall scenario appears to be minimal,” Knightley said.

Falling home prices are a good thing, after all For first-time home buyers and others who want to buy a home The housing market moves to the buyer’s market from the seller’s market for the first time in years. Falling home prices are also a good sign for the Federal Reserve, which is watching for possible signs that housing and rent-related inflation has peaked.

“The Fed wants a correction,” Knightley said. “A downturn in the housing market will dampen the growth story in the US, but it is also important to remember that it will reduce inflation as well.”

He concluded: “We may soon reach a tipping point in the annual rate of change in the major rental components of the CPI, which, if so, could lead to a significant reduction in consumer price inflation until 2023 and likely contribute to bringing back the inflation rate in US to 2% by the end of 2023. While the Fed plays down the likelihood of this, we firmly believe that rate cuts will be on the table in the second half of 2023.”

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