Ivy Zelman, who famously predicted the 2008 housing crash, says that home prices could drop 20% from their current values if the economy doesn't improve

• The Fed's fight against inflation has led to high mortgage interest rates, cooling housing demands.
• As demand falls, Ivy Zelman, a real-estate anaylist, said national home prices could fall by 20%.
• Zelman's view is more bearish compared to that of her peers, who mostly forecast single-digit drops.

For months, homebuyers and real-estate experts have debated the merits of a possible housing crash following the dramatic housing boom durig the pandemic. And as high inflation and a series of aggressive rate hikes from the Fed weaken US consumer sentiment, Ivy Zelman, the CEO of Zelman & Associates and the analyst who famously predicted the 2008 housing bust, believes a dramatic downturn isn't only probable, but is guaranteed if the economy doesn't shape up. 

"If we don't see any type of improvement in the economy and rates are higher than 6%, then I think you're going to see pricing continue to decline nationally in the magnitude of 20%," Zelman said in a recent interview with Ted Oakley, a managing partner and founder of Oxbow Advisors. 

Though Zelman believes that markets without supply constraints, mostly those in midwestern and northeastern states, could see declines "in the mid singles," she said their health will largely depend on the economy's trajectory.

While Zelman's prediction is bearish in comparison to the predictions of her peers — many of whom forcasted single-digit declines — the prognosis has become increasingly likely as price cuts become more widespread across the country.  

Indeed, numbers from Black Knight, a financial-data and research firm, shows that the country's stratospherically high home prices have taken a sizable hit this year as mortgage rates add hundreds of dollars to the typical borrower's monthly payment. With fewer Americans willing to shell out the considerable cash needed to close on a home purchase, prices are now falling at the fastest rate in the past 15 years. 

It's a stark contrast to the housing market of 2020, a time in which rock-bottom interest rates, a flood of stimulus money, and intense buyer competition all led to historically high demand and equally high home values across the country. But entering the tail end of 2022, things couldn't be any more different. 

The massive $2 trillion stimulus from the CARES Act issued at the onset of the pandemic — which was meant to mitigate the economic fallout from the global health crisis — led to a surge in inflation throughout much of this year. Though inflation has eased in recent weeks, several interest-rate hikes from the Federal Reserve have pushed mortgage rates, which recently peaked at 7%, to levels not seen since the housing crash of 2008. 

As long as mortgage rates remain elevated, Zelman said housing demand will continue to shrink — ultimately resulting in even steeper price cuts from sellers.

There's a long way to go before buyers return to the housing market

While mortgage rates are still twice as high as they were last year, the average rate for a 30-year fixed-rate mortgage is beginning to fall as the US economy continues to cool off. 

The downturn is attributed to a shift in trader sentiment, following statements made by Fed chairman Jerome Powell, during last week's speech at the Brookings Institution, where he said smaller interest rate hikes "may come as soon as the December meeting."

His comments fueled speculation among bond investors that inflation has peaked, resulting in a rally in the 10-year Treasury bond price and a drop in its yield to its lowest in more than two months. The average rate on a 30-year mortgage — which is closely correlated to long-term Treasury yields — also fell to 6.49% on Thursday. This latest slide in rates is just 0.59 of a percentage point below the two-decade high that was hit just three weeks earlier.

As rates have now fallen for the third consecutive week, data from real estate brokerage Redfin shows that homebuyer demand may be starting to improve. However, Taylor Marr, Redfin deputy chief economist, said in the brokerage's December housing outlook, that the housing market is "far from out of the woods."

"Key indicators of homebuying demand will likely be teetering on a knife's edge with every data release that comes out related to the Fed's path to eventually bringing rates down," Marr said in the report, adding that although the US is likely past peak inflation and mortgage rates, "there's further cooling ahead for the housing market, as sales and prices have further to fall before buyers and sellers become comfortable with home buying costs again." 

In an interview with Insider, Alan Ratner, the managing director for homebuilding at Zelman & Associates, said this housing downturn could be "a multi-year process" as buyers and sellers are both likely to stay on the sidelines if they are unsatisfied with the offers they receive, or if higher rates dismay them.

But as Zelman herself suggests, if the Fed continues with further rate hikes and mortgage rates remain elevated in 2023, this will become the likely culprit to a protracted housing slump.