The US housing market won't crash, but will see "a major comeuppance" in terms of price declines.
Moody's chief economist Mark Zandi said more and more buyers are simply locked out of the market.
Existing home sales in the US hit a two-year low in June, as prices stayed at record highs.
The US housing market is about to enter a "deep freeze," as surging borrowing rates and stubbornly high prices lock out a growing number of buyers, according to Mark Zandi, the chief economist of Moody's Analytics.
Data on Wednesday showed a drop in existing home sales to a two-year low in June. The National Association of Realtors reported seasonally adjusted sales hit a rate of 5.12 million last month, the lowest since June 2020, and below expectations for 5.38 million.
"It makes sense, with the higher mortgages conflating with higher house prices, first-time homebuyers just can't afford to buy in. They're locked out, and trade-up buyers, they're locked in because if they sell and buy, they've got to get another mortgage at a higher rate and their monthly payments are going to rise," Zandi told CNBC's "Power Lunch" on Wednesday.
"So demand is really weakening very rapidly and, you're right, I think housing is going into a deep freeze," he said.
Potential homebuyers are facing a toxic combination of mortgage rates running at their highest since 2009 above 5% - in line with the increase in interest rates by the Federal Reserve, which is battling inflation at 41-year highs - and a red-hot housing market that was fueled by over a decade of ultra-low borrowing rates.
Home affordability has slumped, triggering a collapse in mortgage applications to 22-year lows, which in turn has weighed on markets for construction materials such as lumber, which has dropped nearly 50% in value this year.
Single-family home prices in the United States are at a record high of almost $407,000, having almost doubled in under 10 years. But Zandi says this figure is a median price and does not reflect that real estate prices are in fact declining.
"You have a lot more homes selling at the higher end of the market, a lot fewer homes selling at the lower end of the market, because first-time buyers are locked out. And that causes that price measure to increase. But the underlying price dynamics, they're weakening very rapidly," he said.
More worrying for the outlook for home prices, inventories of unsold homes ballooned by almost 10% last month, highlighting how properties are taking longer to change hands.
"If you look at inventories across the country, in the most juiced areas of the market coming into this, they're up quite a bit. So everything coming together suggests that in coming months and certainly by the end of the year going into next, we're going to see some real house price weakness," Zandi said.
"Now, having said all of that, I'm not arguing 'crash', but I'm just arguing there's a major comeuppance though coming with regard to house prices. I think the market is under a lot of stress," he added.
Charlie Bilello, the founder of Compound Capital Advisors, a financial advisory firm, tweeted on Wednesday that the downturn that is emerging at the lower end of the housing market is coming for the higher end.
"2 years ago, the 30-yr mortgage rate was 2.90% & the median existing home price in the US was $294k. Today the 30-yr mortgage rate is 5.71% & the median existing home price is $416k. With a 20% down payment, that's a 98% increase in the monthly payment (from $978 to $1,933)," he said in a separate tweet.
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