Investing

The American City Where Home Prices Dropped 50%

One of the worries about high interest rates and a slowing economy is whether home prices will drop sharply. Most economists believe the fall in prices will not be as large as that during The Great Recession. However, if mortgage rates rise above 10%, the housing market could be as badly bloodied as it was in 2008 in parts of the country. In some markets home prices dropped over 30% that year. In one Florida city, prices https://247wallst.com/wp-admin/index.phpcratered 50%.

The Federal Reserve has raised interest rates more aggressively than at any time in the last two decades. Its governors have indicated that it is not over. While the Consumer Price Index increase took a small dip in October compared to figures from the previous three months, it was still up 7.7% compared to a year ago. The Fed’s target inflation rate is 2%, and interest rate increases will need to last at least through next year to hit that number. Mortgage rates have risen from 3% last year to 7% recently. That takes monthly mortgage payments up by hundreds of dollars a month on most mid-priced houses.

The economy has started to slow enough that negative GDP could begin as early as the first quarter of next year. This will cause rising unemployment. A drop in GDP sometimes combats rising inflation. Some economists, like Harvard’s Larry Summers, believe unemployment will need to rise above 5% and perhaps to 7% to slow the economy to a place where interest rates are undercut by falling consumer and business demand.

One major difference between today and The Great Recession is that many Americans had a subprime, variable-rate mortgage. When the interest rates on these reset higher, mortgage payments overwhelmed some homeowners, particularly those out of work. And the jobless rate reached 10% in October 2009, which created a perfect storm for mortgage defaults.

The real estate markets with the fastest rising prices in a housing boom often reset lower during a bad economic period. These homes can become overpriced due to the rush of buyers. Mortgage rates and jobless rates can make those rushed disappear.

This reset of homes happened in the popular housing market in 2008. Several cities in Florida had home prices that dropped over 20%. In Cape Coral, a popular housing market today, home prices dropped over 50% in the fourth quarter of 2008 compared to the same quarter the year before.

How much will home prices drop over the next year? The drop could be double digits in markets with large influxes of people. There is a recent precedent for that.

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