A 20% crash in the housing market is possible as mortgage rates continue to surge higher

Good morning, readers. I'm senior reporter Matt Fox. Phil Rosen will be back next week.

There's a flashing red warning sign hitting one of the biggest segments of the US economy: the housing market.

Existing home sales fell for the eighth straight month in September. That's the longest slump since 2007, just months before the US housing crisis hit a fever pitch and crashed the US economy as foreclosures piled up.

The sharp slowdown in existing home sales has been driven by surging mortgage rates, with the average 30-year fixed rate topping 7.3%, according to the most recent data from Mortgage News Daily. And there are no signs that rates will soften anytime soon, as the Federal Reserve gears up for two more 75 basis points rate hikes in November and December.

This is all a recipe for disaster, and it could ultimately lead to a 20% decline in housing prices, according to Pantheon Macro's chief economist Ian Shepherdson.

Let's get into it.

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1. The housing market is in free fall with "no floor in sight."

Pantheon Macroeconomics' chief economist Ian Shepherdson is sounding the alarm on the housing market, warning that home prices could fall as much as 20%. The forecast comes after existing home sales fell for the eighth straight month in September, the longest slump since 2007.

"The eighth straight drop in existing home sales takes the cumulative fall from the January peak to 27%, but this is not the floor. The surge in mortgage rates to nearly 7% over the past few weeks has triggered a further drop in mortgage demand, and we expect home sales to keep falling until early next year," Shepherdson said.

"By that point, sales will have fallen to the incompressible minimum level, where the only people moving home are those with no choice due to job or family circumstances," Shepherdson said, adding that discretionary home buyers "are disappearing rapidly."

Meanwhile, prices for existing homes have fallen on a sequential basis for three straight months, sending the median price to $384,800 — the lowest since March.

But with mortgage rates rising, even prospective buyers who are looking to downgrade to a cheaper home would face bigger monthly payments, Shepherdson said, providing more incentive to stay put and constraining supply further.

"Prices have to fall substantially in order to restore equilibrium; the supply curve for housing is not flat, so the plunge in demand will drive prices down," he said. "We expect a drop of 15-to-20% over the next year, in order to restore the pre-Covid price-to-income ratio."

How hard will rising mortgage rates hit home prices? Email mfox@insider.com.

In other news:

2. US stock futures fall early Friday, as traders weigh whether the Federal Reserve will keep raising interest rates until inflation is defeated. Meanwhile, Elon Musk reportedly told investors that he planned to get rid of nearly 75% of Twitter's 7,500 workers. Here are the latest market moves.

3. Earnings on deck: American Express, Verizon, and Regions Financial are all reporting.

4. Should you buy Netflix stock following their post-earnings surge on Wednesday? According to Wall Street, it's a mixed bag. Even though the streaming giant added more than 2 million subscribers in the third-quarter, fully reversing its first-half decline, Wall Street isn't fully sold on its future prospects. All eyes are now on their cheaper advertising tier, which will cost $6.99 per month. Read on to see where three Wall Street analysts expect Netflix stock to trade going forward.

5. Interest rates won't stop going up, with US Treasury yields hitting post-crisis highs as expectations for a more aggressive Fed ramp up. The 10-year US Treasury yield jumped to 4.16% on Thursday, while the 2-year yield surged to 4.60%. Those high interest rate levels haven't been seen since 2008 and 2007, respectively. The rise in yields may have been fueled by hawkish comments from Fed officials, which have raised Wall Street's anxiety over an incoming recession.

6. Elon Musk has a new arch-enemy, and it's not an executive at a competing electric vehicle company. It's the Federal Reserve, or more specifically, Fed chairman Jerome Powell. The Tesla CEO slammed the US central bank for soldiering on with interest-rate hikes, despite what he considers growing signs the inflation threat is fading. "The Fed is raising rates more than they should," Musk said on Wednesday. It's worth noting that high growth tech-stocks like Tesla stand to benefit from a reversal in Fed's current tightening policy.

7. Elon Musk also mentioned legendary investor Warren Buffett during Tesla's earning call on Wednesday. Musk was asked whether he saw value in creating a parent or "umbrella" corporation like Google-owner Alphabet. The holding company would bring together his businesses, including SpaceX, Neuralink, and Twitter. "I'm not Warren Buffett. I'm not an investor. I am an engineer and manufacturing person and a technologist," Musk said.

8. Pantheon Macro isn't the only firm that sees downward pressure on home prices in 2023. UBS' head of real estate Matthias Holzhey told Insider that "prices look overvalued. They look too high, even compared to prepandemic levels." Holzhey offers a unique look at where the housing market can go over the next year, and while he expects four straight quarters of declines for home prices, it won't be bad as it was in 2008. Read on to find out why.

9. To some, home price declines could present an appealing investment opportunity if you have a long enough time horizon. Jalen Uboh is one of those investors, as he is currently wrapping up a 250-home development in Fairburn, Georgia. The 26-year old told Insider his six-step process to identifying, building, and completing new home developments.

10. Lumber prices are heating up, having surged 26% so far in the month of October. The price movement has some scratching their heads, given that demand for lumber is largely tied to the housing market, which can't get out of its own way due to soaring mortgage rates. But don't take the bait, as one expert told Insider that any further upside in the essential building commodity is limited.

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Curated by Matt Fox. Feedback or tips? Email mfox@insider.com.

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.