Inflation could fall back to the Fed’s 2% target quicker than the market expects as housing prices are primed for a 20% decline, chief economist says

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  • Home prices could crash 20% as housing supply begins to rise, according to ING Economics.
  • But a silver lining of such a steep decline in home prices is that inflation would fall quicker than expected.
  • A swift fall in shelter CPI “could help to get inflation down to 2% far quicker than many in the market expect,” ING said.

A combination of falling demand and rising supply could send home prices tumbling 20%, according to a Tuesday note from ING’s chief international economist James Knightley. 

A decline in home prices could already be seen in the S&P Case Shiller data, which saw a 1.3% month-over-month decline in home prices in August. That’s after prices fell 0.7% in July. The housing market hasn’t experienced a back-to-back monthly decline in home prices since early 2012.

But there is a silver lining to the potential decline in home prices, and that’s falling inflation. According to Knightley, such a drop in home prices would hasten the drop in inflation, which would allow the Fed to ease its interest rate hiking policy. 

“We could see a much swifter turn in shelter CPI than we would normally have expected, which given it’s one-third weighting within the CPI basket of goods and services, could help to get inflation down to 2% far quicker than many in the market expect,” Knightley said.

Driving the housing price decline is a number of factors, according to Knightley, including higher mortgage rates, rising supply of homes for sale, and waning demand. That’s a marked shift from the past two years when surging demand and historically low interest rates sent home prices jumping 40%. 

“We are now entering a very different environment,” according to Knightley. Some of the home price declines are more pronounced in cities that saw the biggest price rises during the pandemic, which include Seattle, San Francisco, and Dallas. 

And a rebound is likely far off as falling equity markets aren’t helping those that are saving for down payments.

“The rising cost of living and falling equity markets amid a general lack of affordability have made it more challenging to save enough of a down payment for first time buyers, the lifeblood of the market,” Knightley explained.

Additionally, housing supply is jumping considerably, with new homes for sale up 50% since February while the number of existing homes for sale is up 64% since the October 2020 low, according to the note.

“This means we are moving from a market that was suffering from significant excess demand to one where there is a risk of modest excess supply dominating the story over the coming year, especially if recessionary forces result in rising unemployment,” Knightley said. 

With the median price for an existing home 5.3 times the median level of household incomes, Knightley projects a 20% decline in home prices would get the house price-to-income ratio back to its long-run average of about 4 times.

Read the original article on Business Insider
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