‘The housing market is in the early stages of a substantial downshift’: Home sales may drop 25% by the end of summer, according to this analyst. Here’s why.

“The housing market is in the early stages of a substantial downshift in activity, which will trigger a steep decline in the rate of increase of home prices, starting perhaps as soon as the spring,” Shepherdson wrote in a research note distributed Sunday.

As evidence of this expected slowdown in home sales, Shepherdson pointed to mortgage demand. The most recent data on mortgage applications from the Mortgage Bankers Association shows that the number of applications for loans used to purchase homes is down more than 8% compared to a year ago. Comparatively, demand for refinancing has dropped nearly 50% versus last year.

A drop in mortgage demand could predict a downturn in home sales, since most buyers rely on financing to make sure a large purchase. Issues around affordability are likely to blame for the decline. As of Thursday, the average interest rate on the 30-year fixed-rate mortgage surpassed 4% for the first time since May 2019, according to Freddie Mac
FMCC,
+3.50%.

Per Shepherdson’s calculations, the rise in mortgage rates since September has increased the cost of a monthly mortgage payment for a median-priced home by more than $400, or 27%.

“That’s a huge increase, even for households sitting on savings accumulated during the pandemic—a one-time increase in savings can’t finance an increase in mortgage payments for the next 30 years—and it will push demand down a good deal further,” he wrote.

Indeed, affordability is top of mind for today’s home buyers. A recent survey conducted by U.S. News & World Report found that nearly half of buyers say affordability is their biggest concern, though a majority of those surveyed indicated that they were still optimistic they would be able to purchase a home in the next year.

The ripple effects of a shift in existing-home sales would be far-reaching, Shepherdson said, arguing that the pace of rent increases would eventually slow and perhaps even reverse. It also would spread to new-home sales, which he expects will likewise fall. A decrease in new-home sales would represent a downward drag on GDP, since that would implicate less demand for services tied to home-building and less spending on items like building materials and appliances.

The bad news for any Americans who persist in trying to buy a home under these conditions is that it’s less clear how this situation will ultimately impact the availability of homes for sale. Part of why home prices have surged is that there is a significant lack of inventory in the housing market, which has fueled competition for what few homes are listed for sale.

A drop in demand would seemingly lead to a boost in the inventory of homes for sale. But Shepherdson cautioned that many sellers may pull listings or decline to put their home on the markets because “no one […] wants to be the last person trying to sell into a falling market.”