Economists are holding their breath ahead of S&P Global’s January Case-Shiller U.S. Home Price index report, which is due Tuesday. Is the U.S. heading for a housing market crash?
Well, if the trend continues from last month, the United States could be on track for a nasty downturn at the very least.
The Case-Shiller tracks U.S. monthly home price changes in 20 major metropolitan areas. As such, it’s an important indicator of trends in the real estate space.
If you recall, the December Case-Shiller report showed that while home prices were up 5.8% annually, they had fallen 4.4% from their June peak. That marked the eighth-consecutive month of slowing home prices.
Indeed, it seems elevated mortgage rates, still stubborn inflation and mounting recession fears have pushed some to suspend the house hunt, putting downward pressure on home prices in the process.
While some cities still experienced major gains — like Miami, Tampa and Atlanta, each up more than 10% — on the whole, December 2022 marked a decline.
S&P DJI Managing Director Craig Lazzara told CNBC the following:
“The prospect of stable, or higher, interest rates means that mortgage financing remains a headwind for home prices, while economic weakness, including the possibility of a recession, may also constrain potential buyers […] Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken.”
Mortgage rates are likely the primary culprit behind the real estate cold streak. Indeed, the 30-year fixed-rate has hovered close to 7% since October. This has accompanied a marked drop in completed home sales and a troubling rise in home sale cancellations.
Of course, this is in no small part due to the Federal Reserve. As the central bank continues raising interest rates, mortgage rates are liable to come up all the same, something economists are keeping a close eye on going deeper into the current rate-hike cycle.
What should you look out for in Tuesday’s Case-Shiller report?
Housing Market Crash Fears Higher Ahead of Case-Shiller Report
The January Case-Shiller report holds particular importance as the first major housing data release of the index in the new year. Indeed, should the report come out bleaker than expected, it could set the tone for a continued downtrend in real estate heading further into the year.
In that regard, even a modest improvement would be seen as promising. Unfortunately, current expectations are for another drop in the median national home price, however.
According to Trading Economics, the index is expected to continue its fall in January. Current projections have the Case-Shiller falling to a 2.5% year-over-year (YOY) increase, implying yet another month of declining median home prices.
Should this prediction come to fruition, it could represent yet another indicator that a wider correction is coming for the once red-hot housing market.
Just last month, Dallas Fed economists issued a stark warning that further rate hikes could prompt a nearly 20% drop in U.S. housing:
“[I]f the observed price-to-rent ratio grows at an explosive rate relative to its fundamental-based ratio estimated with long-term interest rate and rent growth data, the bubble hypothesis merits attention.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.