Home prices will fall 15% over the next year as high interest rates squeeze the housing market, economist says

• Home prices are set to drop 15% over the next year, according to Pantheon Macroeconomics.
• That's because rates are likely to remain high, helping push down affordability and demand as a result.

Home prices are still set to drop over the next year, as high interest rates continue to squeeze the housing market, according to Pantheon Macroeconomics.

US home prices have fallen amid higher mortgage rates over the last year, notching their seventh straight month of declines in January. But the downside for prices isn't over, Pantheon's senior economist Kieran Clancy said, warning home prices could continue their march lower this year:

"We look for an additional drop of around 15% over the next year," Clancey said in a note on Wednesday, pointing to how high prices are in a historical context. Mortgage payments are now estimated to be around half new homebuyers' disposable income, though payments only accounted for around 30%-35% of buyers' disposable income prior to the pandemic.

That suggests home prices will become more affordable as the housing market continues to correct, particularly since the Federal Reserve has signaled its intention to keep interest rates restrictive through the rest of the year, which could influence mortgage rates to remain elevated.

"Interest rates are likely to remain elevated for some time – even if they do not rise much further – so an improvement in affordability will need to come via a decline in prices," Clancey added.

That comes amid a timing of quickly shifting dynamics for US housing, with some commentators last year having warned of a crash in home prices. Mortgage rates touched a 20-year-high in 2022 and have stayed elevated, crimping housing affordability and demand while putting downward pressure on prices.

But some economists think a recovery could be around the corner. National Association of Realtors senior economist Nadia Evangelou previously told Insider she predicts a housing rebound in 2024. Despite high mortgage rates, demand is still greater than housing supply, and there are signs more home buyers are dipping back into the market, with mortgage applications surging 3% in the last week and pending home sales rising 0.8% in February, above the expected 2.3% decline.