US home prices to fall less than expected despite high borrowing costs

US home prices will decline less than previously expected this year before stagnating in 2024, despite widespread expectations interest rates will remain higher for longer, according to property analysts polled by Reuters.

Even though the US Federal Reserve has embarked on its most aggressive tightening cycle in four decades, average home prices have fallen just over 5 per cent from their recent peaks, barely a dent compared to the 45 per cent rise during the COVID-19 pandemic.

That resilience in one of the most interest-rate sensitive sectors of the economy is largely down to the stubbornly-tight supply of homes, which was not expected to ease for at least the next six months.

Home prices, which resumed their rise in March after eight months of declines, will fall 2.8 per cent this calendar year on average, a May 15-30 poll of 30 property analysts showed. That is less than the 4.5 per cent drop predicted in March.

Average house prices as measured by the S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas were forecast to stagnate next year.

The predicted 9 per cent peak to trough fall is less than one-third of the slump during the 2007-2008 global financial crisis, leaving prices well out of reach for aspiring homeowners.

"Looking ahead, we think there is scope for prices to fall a little further. Affordability is still stretched and a weakening economy will weigh on homebuyer sentiment," said Sam Hall, property economist at consultancy Capital Economics.

"Given supply is likely to stay tight, there is a risk house prices may not fall as much as we previously expected."

Elevated house prices along with high consumer inflation suggests the Fed, which has raised its key rate from near-zero in early 2022 to 5.00-5.25 per cent, will at least hold until end-2023, keeping upward pressure on mortgage rates.

The 30-year fixed mortgage rate, currently around 6.7 per cent, was expected to average 6.2 per cent in 2023. It is forecast to slip to 5.5 per cent in 2024 on expectations the Fed will be cutting rates then.

Those high mortgage rates are restricting housing supply, which puts upward pressure on prices, as well as demand.

"Despite mortgage rates more than doubling since 2021, property owners haven't been forced to sell because most have a job, and many are reluctant to list because they have a sweet deal on a long-term mortgage," said Sal Guatieri, senior economist at BMO Capital Markets.

Existing home sales are currently running at an annualised rate of 4.28 million units - significantly lower than a peak of 6.56 million in January 2021 - and are forecast to remain around that rate.

Just over 70 per cent of respondents, 16 of 22, said a significant downturn was more likely than a rebound for home prices during the remainder of the year.

"If the Fed is forced to tighten policy further to contain inflation, the market could resume a downward slide," added BMO's Guatieri.