A housing market correction will take a long time and prices need to fall as much as 20% in the next few years to return to their historical trend

  • The housing market correction will take time, according to DataTrek's Nicholas Colas.

  • Colas pointed to the length of previous housing cycles, where home prices strayed from long-term trends for years.

  • He predicted home prices would need to drop by 15%-20% for the market to return to its long-term growth trend.

A housing market correction will take a long time, and prices need to fall as much as 20% over the next few years to return to their historical trend line, according to DataTrek.

In a note on Wednesday, the research firm pointed to the length of previous home price cycles,  with the 1990s housing bubble lasting until 2004, and the mid-2000s housing bubble dragging on for nearly a decade. That suggests the current boom in home prices could also take years to unwind, according to DataTrek co-founder Nicholas Colas.

"US home prices need to fall by about 15-20 percent over the coming years in order to return to their long run growth trend. That process is clearly starting but has a good way to go." Colas said. Although the pandemic-spawned housing crisis isn't as severe as previous bubbles, he noted that peak home prices in June were still 29% above trend.

Housing has been under pressure amid the Fed's aggressive rate hikes this year, with the central bank raising rates nearly 400-basis-points and eyeing another 50-basis-point rate hike in December. Mortgage rates briefly popped up to a 20-year-high over 7%, leading some economists to warn of an imminent housing crash and potential free-fall in home prices.

Rates have just barely edged lower, with the 30-year-fixed-mortgage rate easing to 6.49% in the last week. Meanwhile, the Mortgage Bankers Association's mortgage purchase index rose 3.8%, notching its fourth-straight gain - a sign that demand is also starting to correct. Refinancing demand dropped 13% and overall applications were down .8% in the last week.

"Higher mortgage rates will do part of the work in bringing prices back down, of course, but history says any correction in this market will take time," Colas said.


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