US house prices might slump 10% over the next 2 years as higher mortgage costs bite, Moody’s economist says

• US house prices are likely to fall by 5% to 10% in the next two years, a Moody’s economist says.

• Higher mortgage rates and a growing supply of homes will push down prices, Matthew Walsh said.

• Elite investor Jeremy Grantham also expects house prices to drop to more affordable levels.

The US housing market will beat a retreat as more expensive mortgages crimp demand and the supply of homes swells, a Moody’s economist predicts.

House prices are likely to slump by 5% to 10% over the next two years, Matthew Walsh told Yahoo Finance in a recent interview. He pointed to the sharp rise in house prices over the past decade, and mortgage rates jumping from around 3% at the end of 2021 to north of 6% today.

“Home affordability is a major problem,” Walsh said, noting that median home prices are “still very high relative to their historic values.”

He also suggested the amount of homes for sale will rise as the spring homebuying season kicks in, exerting downward pressure on prices.

Jeremy Grantham, GMO’s cofounder and an expert in asset bubbles, recently issued a similar outlook.

“I don’t expect a crash but I expect house prices to drift back into more affordability,” he told CityWire.

The veteran investor and market historian also warned that declining house prices often curb economic growth. Homeowners feel less wealthy when their homes fall in value, which spurs them to cut back on spending, he explained.

“It doesn’t happen overnight, but housing casts a very long shadow and economically is more dangerous than the stock market,” Grantham said.

The housing market has rebounded strongly since the 2008 financial crisis, thanks in part to expansionary fiscal and monetary policy. However, in response to inflation hitting a 40-year high last year, the Federal Reserve has hiked interest rates from nearly zero to about 5%. That has translated into higher monthly payments on credit cards, car loans, mortgages, and other forms of debt.

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Americans are now being squeezed by fast-rising prices and increased borrowing costs, leading the likes of Walsh and Grantham to predict house prices will fall.

“It’s a pretty tough time to buy a home,” Christopher Mayer, a real estate professor at Columbia Business School, told Yahoo Finance recently.

He pointed out that many people’s wages haven’t kept up with rising living costs and house prices, meaning they’re effectively priced out of the market.

Read the original article on Business Insider