(Bloomberg) -- US house prices could tumble as much as 20% in the wake of the surge in mortgage rates, according to research from the Federal Reserve Bank of Dallas.
House prices, adjusted for inflation, soared during the pandemic by the most since the 1970s, analysis by Dallas Fed economist Enrique Martinez-Garcia showed. A “pessimistic” scenario where prices now retreat by 15% to 20% could subtract 0.5% to 0.7% from inflation-adjusted consumer spending, he wrote in a blog post Tuesday.
A hit of that order to consumption would in turn weigh on Fed policymakers’ ability to avoid a recession as they rapidly raise interest rates to bring inflation under control, Martinez-Garcia wrote.
“Such a negative wealth effect on aggregate demand would further restrain housing demand, deepening the price correction and setting in motion a negative feedback loop,” Martinez-Garcia wrote in a blog post published Tuesday.
The Fed has raised rates by 3.75 percentage points this year as it tries to cool 40-year high inflation. That’s driven mortgage rates to the highest in more than two decades. Average 30-year fixed-rate mortgages now top 7%, from little more than 3% at the end of last year.
Mortgage debt-service payments as a share of personal disposable income was forecast to top 6% by the end of the third quarter of this year, from 3.9% in the previous three months, Martinez-Garcia wrote.
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