Housing market affordability is so out of whack that ‘the bulk of the drop in home prices is yet to come’, says Pantheon Macroeconomics

In their eyes, the U.S. housing market’s bounce this spring was simply a head fake.

“We are baffled by the emerging narrative in the commentariat that housing is now recovering, because it isn’t. Home sales jumped at the start of the year, lagging the late-2022 dip in mortgage rates, but they have fallen more recently thanks to the latest back-up in rates, and mortgage applications signal that they will soon dip to a new cycle low,” wrote Kieran Clancy, the senior U.S. economist at Pantheon Macroeconomics.

The key hurdle to a true recovery in the housing market, Clancy writes, is affordability. Last year’s mortgage rate shock, combined with national home prices spiking over 40% during the Pandemic Housing Boom, has deteriorated housing affordability in a way unseen since the housing bubble peak in 2006.

“The broader point here, though, is that the bulk of the drop in home prices is yet to come; the lagged effect of the plunge in sales points to a steep and sustained drop. The speed and scale of the adjustment in prices is uncertain, but the direction of travel is clear,” wrote Clancy.

While Clancy thinks national house prices have further to fall, economists at firms like CoreLogic and Zillow think national home prices bottomed earlier this year. For evidence, those firms have pointed to the fact that national house prices, along with new home sales, are rising again.

However, the housing market’s stronger than expected spring performance isn’t enough to convince Pantheon Macroeconomics. In particular, Pantheon’s Clancy points to the homebuilder rebound as driven by “aggressive [builder] discounts and a lack of resale inventory—not an actual housing market recovery.

“The shift in sales towards new homes does not change the bigger picture, however, which is that a durable recovery in overall market activity is out of the question until affordability improves. Mortgage payments for a buyer of a median-priced existing single-family home are now about half of average after-tax incomes, up from 30-to-35% pre-Covid. Home sales can’t recover until affordability improves, which requires lower mortgage rates, or falling home prices, or both,” wrote Clancy. “In short, the housing market is not in the early stages of recovery; the downturn merely is morphing from a collapse in demand, sales, and construction, to falling prices and housing-related consumption spending.” 

Keep in mind, when a firm like Pantheon Macroeconomics says “U.S. home prices” they’re talking about a national aggregate.

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