Economist Predicts a 35% Chance of Home Price Crash

No one knows for sure whether home prices will fall by double digits sometime soon, but one economist says there’s a 35% chance they will.

Innes McFee, chief global economist at the independent economics advisory firm Oxford Economics created a computer model of past housing recessions to see what’s likely to happen to residential real estate prices, given today’s economic conditions. He published his findings in a research note. 

Home prices, which soared during the pandemic, have begun to fall as skyrocketing mortgage rates have turned the market on its head. The U.S. housing market has a little over a one in three chance of falling by more than 10% (which he defines as a crash), McFee’s model predicts. 

The severity of the home price drop mainly depends on the job market, McFee found: In past housing slumps, prices have held up well if employment stayed high, but collapsed if there were a lot of layoffs that forced homeowners to sell. (The job market is still booming and unemployment low—at least for now.)

High mortgage rates, which drive buyers out of the market, were an important factor, but some housing crashes were preceded by declining mortgage rates, he wrote. (The average 30-year mortgage rate in the U.S. has shot up to a 20-year high and is approaching 7%.)

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