One of the concerns about rising interest rates and a slowing economy is that home prices will fall precipitously. Most economists believe the price drop will be smaller than it was during the Great Recession. However, if mortgage rates rise above 10%, the housing market in some parts of the country could be as bloody as it was in 2008. Home prices fell by more than 30% in some markets that year. Prices in one
The Federal Reserve has raised interest rates more aggressively than it has in the previous two decades. Its governors have stated that the war is not over. While the Consumer Price Index increased slightly less in October than in the previous three months, it was still 7.7% higher than a year ago. The Fed’s target inflation rate is 2%, and interest rate hikes will need to continue at least until next year to achieve that level. Mortgage rates have recently risen from 3% last year to 7%. On most mid-priced homes, this raises monthly mortgage payments by hundreds of dollars.
Check out the complete Top 10 list below, with percentages indicating the change in average home price from June 2022 to September 2022:
|1||Austin, Texas||-10.3%, $588,275|
|2||Phoenix, Arizona||-9.9%, $443,275|
|3||Palm Bay, Florida||-8.9%, $379,995|
|4||Charleston, South Carolina||-8.6%, $500,000|
|5||Ogdun, Utah||-8.6%, $532,500|
|6||Denver, Colorado||-8%, $625,000|
|7||Las Vegas, Nevada||-7.9%, $460,000|
|8||Stockton, California||-7.7%, $581,725|
|9||Durham, North Carolina||-7.5%, $460,000|
|10||Spokane, Washington||-7,.4%, $449,9000|
Phoenix, Arizona also saw a significant drop, with a 9.9% drop to $443,500, while Palm Bay, Florida ranked third, with an 8.9% drop to a $379,995 average price. The list does not include any cities from the Northeast or the Midwest, but it does include a wide range of locations in some of the country’s hottest real estate markets. While prices are down from the market peak, they are still higher than this time last year in all ten cities on the list.
The economy has begun to slow to the point where negative GDP could start as soon as the first quarter of next year. This will lead to increased unemployment. A decline in GDP can sometimes be used to combat rising inflation. Some economists, such as Harvard’s Larry Summers, believe that unemployment will need to rise above 5%, possibly to 7%, in order to slow the economy to the point where interest rates will be undercut by falling consumer and business demand.
One significant difference between now and the Great Recession was that many Americans had subprime, variable-rate mortgages. When interest rates on these reset higher, mortgage payments became too much for some homeowners, particularly those who were out of work. In addition, the unemployment rate reached 10% in October 2009, creating a perfect storm for mortgage defaults.
During a bad economic period, the real estate markets with the fastest rising prices in a housing boom frequently reset lower. Because of the rush of buyers, these homes may become overpriced. Mortgage rates and unemployment rates can cause those who have rushed to disappear.
This home reset occurred in the popular housing market in 2008. Home prices in several Florida cities fell by more than 20%. Home prices in Cape Coral, a popular housing market today, fell more than 50% in the fourth quarter of 2008 compared to the same quarter the previous year.
How much will home prices fall in the coming year? In densely populated areas, the drop could be in the double digits. There is a recent example of this.