Wharton professor Jeremy Siegel sees a downturn in the housing market as further interest rate hikes by the Federal Reserve should push mortgage rates even higher.
The housing market has seen sales cool this year thanks to a more than doubling of the average 30-year fixed mortgage rate. The average 30-year mortgage rate was 6.92% on Thursday, the highest level since 2002, according to data from Freddie Mac.
“I expect home prices to fall 10% to 15% and home prices to accelerate downward,” Siegel told CNBC on Thursday.
Such a decline would send the median sales price of a single-family home in the U.S. to just under $375,000 from a record high of $440,000 during the second quarter.
But the bigger concern for Siegel is what the Fed will do in response to falling home prices: nothing.
That’s because while the Fed tries to tame inflation by raising interest rates, their focus on lagging data will cause them to act too late again. And the main culprit for the government’s poor tracking of inflation, according to Siegel, falls squarely on the housing sector.
“Let’s go to the housing sector, up 0.7%,” Siegel said, referring to the September CPI report that showed inflation was still above expectations. “That number doesn’t surprise me at all because that number is ridiculous. It has no bearing on what the actual rate of inflation is. Housing, which is almost 50% of the base rate, is the most skewed of all.”
“This is absolutely ridiculous. Housing prices are going down, not up, by every measure. Even rents, yes, are up from a year ago, but talk to people about that.” [landlords]they say i can’t get jumps [on rent] which I got earlier this year. That should be minus 0.7%, which by the way wipes out core inflation for September,” Siegel said.
As an example of the “distorted way the government does housing statistics,” Siegel explained that from March 2020 to the peak of the housing market this summer, indicators showed housing increased by 40%.
“What do you think the housing factor CPI went up? By 11%! Because of the lag that caused prices to rise,” Siegel said. This problem could persist for many months, according to Siegel, and could put the Fed on a path to plunging the economy into a depression if it continues to raise interest rates further.
“Over the last year and a half, we’ve had a lot more inflation because inflation hasn’t been in that housing sector, and now that the housing sector is down, are you going to see the next month or the month after that the housing sector will be core negative?” “No! You’re going to continue to see it positively. It’s imperative that the Fed recognize that this is not an indicator of the true rate of inflation,” Siegel said.