Dallas Fed Forecasts Up to 20% Drop in U.S. Home Prices in 2025 Amid Rising Mortgage Rates
The Dallas Federal Reserve warns that escalating mortgage rates in 2025 could cause U.S. home prices to fall by as much as 20%, impacting the housing market and consumer spending.
The surge in mortgage rates throughout 2024 is poised to significantly impact the U.S. housing market, with home prices potentially declining by up to 20%, according to a recent analysis by the Dallas Federal Reserve.
As mortgage rates have climbed sharply—from approximately 3% at the start of the year to over 7%—the cost of homeownership has increased substantially. This rise is raising concerns about a severe correction in house prices, which could reshape the real estate landscape.
Dallas Fed economist Enrique Martinez-Garcia describes the predicted 15-20% price drop as a "pessimistic scenario," but one that could have serious repercussions. Should this scenario unfold, personal consumption may decrease by 0.5 to 0.7 percentage points, reflecting the broader economic impact of declining home values.
Martinez-Garcia explains, "A negative wealth effect from falling home prices would suppress overall housing demand, intensifying the price correction and potentially triggering a self-reinforcing downward cycle in the market." This feedback loop could prolong the housing market downturn if not carefully managed.
The Federal Reserve's aggressive interest rate hikes are aimed at curbing inflation but come with the risk of cooling the housing sector too rapidly. Martinez-Garcia emphasizes the delicate balance the Fed must strike: "Ideally, the Fed will navigate reducing inflation without igniting a sharp decline in home prices."
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