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The Housing Market Seesaw: Shiller Predicts an End to the Decade-Long Rally Post Fed’s Hiking Cycle

Yale economist Robert Shiller predicts a potentially significant shift in the housing market once the Federal Reserve concludes its tightening cycle. With over a decade of consistent home price increases under its belt, this trend could soon face a reversal, according to Shiller.

The S&P CoreLogic Case-Shiller Index of home prices has been climbing since early 2012. Although there was a downturn following a peak in June 2022, by January, the upward trajectory resumed. The past year’s Fed rate hikes have impacted mortgage rates, which simultaneously restrained the supply of existing homes on the market and increased homebuyer demand, Shiller noted.

He explained, “The fear of interest rate increases has influenced people’s thinking. It’s not just homeowners but also new buyers eager to lock in before the interest rates rose further. This has positively impacted the market, but this effect is nearing its expiration date.”

Shiller acknowledged an “unusual behavior” in the index that he co-founded with economist Karl Case over the past six months. As the housing market dipped and then rose again, it left many puzzled about what actions the Fed might take next.

This unpredictability starkly contrasts with the housing market’s traditional image, typically seen as more predictable, particularly following a decade of consistent home price growth. However, Shiller warns, “This might be nearing an end with the conclusion of this interest-rate-rising cycle.”

Not everyone agrees with Shiller’s forecast, though. Several Wall Street analysts view the end of the Fed rate hikes as bullish for home prices, arguing that as borrowing costs moderate, demand may increase.

Real estate forecaster Barry Habib, for instance, predicted that an impending slowdown could trigger interest rate cuts, easing mortgages and pushing prices up by 3% to 7% over the next few years. However, Barry Ritholtz, CIO at Ritholtz Wealth Management, aligned more with Shiller, suggesting that rate cuts could lower housing costs, as higher rates have limited the housing supply.

In the upcoming week, the Fed is set to meet again, with another quarter-point increase expected. This could mark the end of the current rate-hiking cycle. Meanwhile, with recent consumer and producer price data indicating an unexpected cooling of inflation, Wall Street is starting to retreat from predictions of more rate hikes this year.