CNN Business recently reported a major shift in the U.S. housing market. After two years of steep appreciation, home prices have peaked. The decision by the Federal Reserve to rapidly increase overnight interest rates to combat the worst inflation in a generation is largely responsible. Higher mortgage rates are sapping affordability, sidelining prospective buyers.

The National Association of Realtors reported that signed contracts on existing homes were nearly 20% lower in July 2022 than in July 2021. CNBC reported than more than 20% of sellers dropped their asking price in September, and purchases of new U.S. homes declined by 10.9% to a 603,000 annualized pace. New home purchases account for about 10% of the market. Sales declined in two of the four U.S. regions, led by a 20.2% plunge in the South.

Existing home sales dropped for an eighth consecutive month, the longest stretch since 2007. Mortgage purchase applications are down 41.8% on a year-over-year basis. Total mortgage purchase applications are lower than at any point during the Great Recession.

Moody’s Analytics predicts that U.S. home prices will fall 10% from peak-to-trough. The Moody’s forecast assumes that the U.S. does not slip into a recession. Mark Zandi, chief economist at Moody’s Analytics, predicts that if we have a recession, the decline in peak-to-trough home price likely would be 15% to 20%. In “significantly overvalued” housing markets, the decline would likely be between 25% to 30% in his opinion.

Buying is less affordable now because of our soaring mortgage rates and elevated home prices. The 30-year fixed-rate mortgage recently jumped to 7.08%, reaching the highest level in some 20 years. The monthly principal and interest mortgage payment on the median priced home is up $930 from a year ago, a 73% increase, according to Black Knight, a mortgage data company. Many home shoppers are settling in for a long wait as higher borrowing costs have totally priced them out of the market.

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At the start of 2022, the mortgage rate on a 30-year fixed mortgage stood at 3.22%, which carried a monthly payment of about $1,300 on a $300,000 mortgage. At current interest rates, the payment adds about $700 per month or about $252,000 over the duration of a $300,000 mortgage.

Homebuilder PulteGroup Inc. recently reported that purchase contracts plunged and deal cancellations spiked in the third quarter. Chief Executive Officer Ryan Marshall said the weaker demand was broad across geographies and consumer groups.

The Case-Shiller Indices, which measures U.S. home prices, forecast that “prices are likely to drop further, but not by as much as they did during the housing bust. From the 2006 peak to the 2012 trough, national home prices fell by 27%.”

Jeff Tucker, senior economist at Zillow, said, “It was different in 2008, 2009 because of a push from sellers. Because of foreclosures and short sales, there were a lot of extremely motivated sellers who were willing to take a loss on their homes.”

Tucker believes that the cooling off will be more regional this time. “The drops will be more deeply felt in places where there were larger gains during the pandemic ... many of them in the West and Sunbelt, including cities like Austin, Phoenix and Boise.”

The U.S. housing market has changed markedly. Homebuilder sentiment has declined every month this year and is at the worst level since the early days of the pandemic. Home prices have peaked and are on their way back down. Economists at Goldman Sachs expect prices to decline between 5% to 10% year-over-year by the end of 2023. Wells Fargo expects national median single-family home prices will drop by 5.5% year-over-year by the end of 2023. Wells Fargo researchers wrote, “The primary driver behind the housing market correction thus far has been sharply higher mortgage rates.”

Sarasota resident Ernest “Doc” Werlin spent 35 years in fixed income as a trader and corporate bond salesman, including time as a partner at MorganStanley in charge of corporate bond trading. Send suggestions and comments to ernestwerlin@gmail.com or visit docwerlin.com.

This article originally appeared on Sarasota Herald-Tribune: After two years of steep appreciation, home prices have peaked