The U.S. housing market is experiencing a significant slowdown after two years of rapid growth. The chart below shows U.S. home prices declined -3.3% during the three months from June through September this year, the biggest 3-month decline since the 2008 financial crisis. This recent downward trend is a sharp reversal from 2021 and early 2022 when low interest rates boosted homebuyer demand and caused home prices to climb nearly 20% year-over-year.
The main cause of this decline is the Federal Reserve raising interest rates at the fastest pace since the 1980s, which has pushed the average 30-year fixed rate mortgage back to 2007 levels. Higher mortgage rates have made monthly payments significantly more expensive and homeownership more difficult for many potential homebuyers. With expensive home prices already making housing less affordable, home prices are projected to decline further in coming months as buyers and sellers adjust to the new reality of higher interest rates.
The Federal Reserve’s monetary policy tightening has had a negative impact on the housing marketthis year. New and existing home sales are declining, mortgage applications are falling, and home builder sentiment has weakened every month during 2022. This housing weakness couldcarryforward into 2023 as the effects of higher interest rates impact the U.S. economy. The housing market is a significant part of the U.S. economy, and its large secondary effect on consumption could make it a potential hindrance to economic growth. With Federal Reserve tightening forecasted to end in early 2023, it may take some time for the housing market to recover.