US home prices could tumble nearly 20% and Fed economists warn further rate hikes risk an even worse housing correction: 'The bubble hypothesis merits attention'
The US housing market faces a potential 19.5% correction, and more rate hikes from the central bank could make a crash even worse, Dallas Federal Reserve economists warned
Drawing parallels between the US and Germany, the economists added that some of the housing market froth can be attributed to the affordability crisis, though house-price-to-rent ratios in particular pose reason for concern.
For now, a modest housing correction remains the baseline scenario, but the authors warned that more hawkish monetary policy could trigger a steeper correction.
"The possibility of a domino effect, where investors pull out of international housing seeking safety and liquidity elsewhere, also raises concerns of spillovers beyond Germany or the US to the global economy."
The Fed's aggressive rate-hiking cycle has pushed mortgage rates higher over the last year, hitting 7% in October. Earlier this month, mortgage rates fell back near 6% but are heading back up again.