Rising U.S. mortgage rates could cut home prices by 20%

The Federal Reserve Bank of Dallas has released a study saying that U.S. home prices are likely to decline by 20% due to a sudden and quite tangible increase in mortgage rates.

An analysis by Enrique Martinez-Garcia, an economist at the Federal Reserve Bank of Dallas, shows that the rate of inflation-adjusted house price growth during an epidemic is considered to be the highest in 50 years. Under the "pessimistic" scenario, home prices stand a good chance of falling by 15-20%. Moreover, in such a scenario, inflation-adjusted consumer spending also declines, but by 0.5-0.7%.

Martinez-Garcia also notes that this scenario could prevent Fed officials from dealing with the recession, as they mostly use rising interest rates to deal with it, as well as to lower inflation. Rising interest rates, in turn, could hit housing demand, thereby exacerbating the price correction and triggering a negative feedback loop.

In an attempt to curb inflation, the Fed had to raise the interest rate to 3.75%. As a consequence, mortgage rates have also risen. Currently, the mortgage rate for 30-year mortgages on average exceeds 7%, while at the end of 2021 the rate was just over 3%. It’s noted that this is the highest rate in the U.S. over the past 20 years.