Severe US housing downturn ‘possible,’ prices could fall 15%: Fitch

The probability of a “severe downturn” in the US housing market is on the rise, according to new guidance from credit reporting agency Fitch.

Fitch’s likely projections suggest that US home prices could sink by 10% to 15% in the case of a major housing slump, alongside a roughly 30% decline or more in housing activity over the next few years.

 “The likelihood of a severe downturn in US housing has increased; however, our rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023, and further pressure in 2024,” Fitch analysts said in a release on Tuesday.

The agency noted a severe downtown was “possible, but not yet probable,” with a minor slowdown still the most likely outcome for the housing market. Fitch said it recently affirmed a “stable outlook” for US homebuilders.

Fitch pointed to several factors as “key indicators” for the health of the housing market, including US GDP growth, unemployment, consumer confidence and home affordability.

House for sale
Mortgage rates have nearly doubled this year.
Getty Images/iStockphoto

The firm warned it could “lower our rating case projections if trends weaken beyond our expectations.”

Additionally, Fitch said its “stress case” for the housing market in the event of a sharp economic downturn suggested that homebuilder deliveries would sink by about 20% in 2023 and 10% in 2024. In that case, average sale prices of US homes could “fall to mid-to-high single digit percentages annually.”

“Builders that do not build sufficient cash reserves in a downturn would likely need to issue debt to rebuild inventory positions in a housing recovery, which would stretch credit metrics,” the analysts added.

US GDP, the broadest measure of economic activity, recently declined for the second straight quarter. Economists widely view two straight quarters of sinking GDP numbers as an indicator of a recession.

Warnings about a potential housing downturn have spiked in recent months as the Federal Reserve has tightened monetary policy. Mortgage rates have nearly doubled since January, causing an affordability crisis for prospective homebuyers.

Earlier this week, the National Association of Home Builders declared a “housing recession” after builder confidence sank for the eighth consecutive month.

“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” said NAHB chief economist Robert Dietz.

In July, Ian Shepherdson, a chief economist at Pantheon Macroeconomics, warned in a note to clients that home prices would likely fall “quite substantially” due to “cratering” demand among cash-strapped homebuyers.

At the time, Shepherdson said prices were likely “15% to 20% overvalued” relative to incomes.

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