U.S. home prices could plunge as much as 20% due to a sharp rise in mortgage rates this year. Higher rates are dramatically increasing home ownership costs and “boost the odds of a severe house price correction,” according to a report from the Dallas Federal Reserve Bank.
Dallas Fed Economist Enrique Martinez-Garcia did say the potential for the nation’s homes to shed as much of a fifth of their value represents a “pessimistic scenario.” If home prices drop 15-20% under Martinez-Garcia’s scenario, he said personal consumption could drop by 0.5 to 0.7 percentage points.
“Such a negative wealth effect on aggregate demand would further restrain housing demand, deepening the (home) price correction and setting in motion a negative feedback loop,” Martinez-Garcia said in a release.
Average rates on a 30-year fixed-rate mortgage have jumped from about 3% in January to over 7% as the Federal Reserve aggressively hiked interest rates in an effort to cool inflation.
Martinez-Garcia said that ideally the Fed will “carefully thread the needle of bringing inflation down without setting off a downward house-price spiral.”