Will House Prices Go Down? Fed Official Gives Prediction

House prices across the U.S. are unlikely to come down significantly any time soon, according to Federal Reserve official Tom Barkin.

Barkin, CEO of the Federal Reserve of Richmond, told Bloomberg's podcast Odd Lots this week that demand for housing had grown in a way that seems irreversible since the pandemic—and that is likely to keep prices high across the country.

"I just think there has been a secular change in the priority people place on housing in their demand, in their wallet. If you're spending 5 days a week at home, 7 days a week at home, your house matters a lot more," Barkin told host Tracy Alloway.

"Your office matters a lot more, your patio matters more, your furniture matters more. We saw that during COVID, so I just think people are much more focused on their house than they were before and that has created a demand increase," said Barkin, who has held the top job at the Richmond Fed since 2018.

In addition, he said, millennials are creating families and want to buy family homes, while members of the older generation find the idea of moving to a care home less "attractive" in the wake of the pandemic—contributing to the increase in demand.

At the same time, interest rates are higher and the supply of houses for sale is still "very limited," Barkin said.

"The existing house market, the supply is very weak and the demand is coming off, but it's still in excess of supply and that's what is keeping the prices high."

Home prices skyrocketed during the pandemic, when demand was high and mortgage rates were relatively low. This in turn created the conditions for an affordability crisis that hit many aspiring homebuyers last year, after the Federal Reserve raised interest rates and mortgage rates jumped up rapidly.

As of August 31, the latest data available on Zillow, the average value of a U.S. home was $349,770. This is 0.4 percent up on the average one year ago.

Although house prices slid between last summer and the first half of the year, during what many housing experts described as a "correction" of the market, prices are still high.

Barkin said home prices had "definitely stabilized from the extreme spikes we saw a year-and-a-half ago, but it certainly hasn't come down in any kind of scale."

What's preventing house prices from going down, according to Barkin, is the imbalance between demand—which remains historically high—and supply—which has remained low despite recent improvements.

"To get into balance, you can get there with lots of different goods and services pricing in different ways," he said. "You don't just need to get one element. Now, housing is a big part of the economy, so if rents come into line and housing comes into line, that would be useful," he added.

"But relative prices move all the time, and if what we've seen is a secular shift toward more demand for housing, that might mean somewhat lessening house prices and somewhat more lessening of other prices," Barkin said.