US housing activity is in the early stages of a large correction, and prices will drop by mid-single digits, analyst says

US home prices have soared over the last decade, but could soon be on their way down.

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• US housing activity is headed for a large correction, and prices will post single digit declines next year, according to Comerica. 
• Chief economist Bill Adams said price declines will be steeper in "the most unaffordable cities on the West Coast."
• He also estimated real estimate investment will fall 18% from 2022 to 2023, and sales of new homes will sink 25%.

Activity in the US housing market is headed for a major correction, and home prices will drop by single digits next year, according to Comerica chief economist Bill Adams. 

The forecast came after the S&P CoreLogic Case-Shiller 20-City House Price Index fell 1.3% in August from the prior month, which also was revised lower to show a 0.7% drop instead of a 0.4% dip. 

In a Tuesday note, Adams said that amid a market with mortgage rates nearing 7% and still-tight inventory, the US is in the "early stages of a large correction in housing activity and likely a more modest correction in prices."

Among key housing activity metrics, real residential investment next year will drop 18%, and sales of new single-family homes will tumble 25% to 463,000, Adams predicted. 

Meanwhile, he sees home prices falling by mid-single digits from peak to trough between mid-2022 and mid-2023.

"House price declines will likely be larger in the most unaffordable cities on the West Coast, and smaller in cities that have seen accelerating population growth since the pandemic hit like the Florida metros," Adams said. "The devastation of Hurricane Ian worsened housing scarcity in Florida, which is showing up in smaller house price declines than the rest of the country."

He also noted that a swath of buyers shored up ultra-low mortgage rates during the height of the Covid-19 pandemic, which is deterring them from moving in the future — and the "disincentive is even larger now that the housing market has turned."

"That will keep listings of existing homes low over the next year, limiting the extent of further declines in home prices," Adams said. 

His housing outlook falls in line with a growing grim consensus on Wall Street, as the Federal Reserve essentially forces the housing market toward a downswing which will weigh on GDP. 

"With fewer Americans moving, sales of household durable goods will also slow, a further headwind to the economy," he said. 

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