More declines in house prices are coming, says top economist David Rosenberg

• Housing affordability remains near the lowest levels in decades.
• With mortgage rates unlikely to move and rents unlikely to rise, prices are set to fall.
• That’s according to David Rosenberg, who said monthly payments for first-time buyers were up 33% year-over-year.

It’s a terrible time to buy a house.

The data tells this story: Existing home sales are down 23% from last year and have seen monthly declines in 14 of the past 15 months, economist David Rosenberg noted in a recent client note.

With housing affordability close to its worst levels in decades, Rosenberg – the founder of Rosenberg Research and former chief US economist at Bank of America Merrill Lynch – said house prices were likely to fall further. According to the S&P CoreLogic Case-Shiller US National Home Price NSA Index, home prices have already fallen by 4.9% since June 2022.

Housing affordability is calculated by considering three variables: house prices, mortgage rates and income. With the last two variables unlikely to materially change in the foreseeable future, Rosenberg said house prices are the ones that will have to change.

“Homeowner affordability is more than 30% worse than the norm in the last quarter, which means that outside of the income boom (which probably won’t happen at this point), massive rate drops (the Fed isn’t playing ball ), so all that’s left to signify the reversal of this series is house price deflation (which, as we’ve seen so many times in the past, will lay the groundwork for lower interest rates),” he said in the note.

He added, “I mean – look at the typical monthly payment for a first-time buyer of $1,825, which is 33% higher than the same period last year.”

Despite last year’s downward trend, home prices actually rose month-over-month in February for the first time since June 2022, according to Case-Shiller data. According to Redfin’s domestic price data, which is reported with less delay, prices rose month on month in March and April as well. The rally has raised questions about whether the market is bottoming out.

But Rosenberg attributed the increase to seasonality, and when adjusted for that, the weak market trend still showed.

“While average selling prices were up +3.6% in April, that was actually pretty weak for spring. 14.3% at this same point in 2022,” he said. “Not since January 2012 have we seen the 12-month trend in house prices this negative.”

what others are saying

Rosenberg isn’t the only economist calling for more declines in house prices. Desmond Lachman, a former deputy director of the International Monetary Fund, said earlier this month that a tightening of credit conditions would weigh on buyer demand, as would a recession.

Ian Shepherdson, the chief economist at Pantheon Macroeconomics, who said in 2005 that a housing crisis would trigger a recession, has made the same argument in recent weeks.

“April mortgage applications appeared to have hit a new low. Now that’s impressive because mortgage rates are no longer at their peak, but applications are still falling. And to me, that suggests that credit standards are becoming tighter,” he said. “When you have very tight credit terms, it can be a lot harder on average to get a mortgage anyway.”

The chart below shows the percentage of banks that report that they are restricting access to credit for small and large businesses. After runs on deposits forced the closure of Silicon Valley Bank, First Republic Bank and Signature Bank, banks are looking to maintain higher levels of liquidity.

Both Lachman and Shepherdson are calling for 15-20% declines from peak to trough.

Others are calling for milder declines than Lachman and Shepherdson. Credit Suisse’s chief US economist Ray Farris said in early May that prices would fall another 5-10%. Morgan Stanley’s chief US economist, Ellen Zentner, also sees price declines of 10% or less from peak to trough. Both see a soft landing scenario where inflation continues to fall and the US economy avoids a recession.

Another threat to house prices is the debt ceiling impasse. If lawmakers fail to reach an agreement in the coming days, the US could default on its debt as early as June 1. and affordability, Moody’s Chief Economist Mark Zandi recently told Fortune.