Home News Jerome Powell just warned that the US housing market needs a ‘difficult correction’ so that folks can afford homes again ⁠— but here’s why it’ll look nothing like 2008

Jerome Powell just warned that the US housing market needs a ‘difficult correction’ so that folks can afford homes again ⁠— but here’s why it’ll look nothing like 2008

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Property investors have generally been doing well over the past few years. But if interest rates rise, things could change.

The US Federal Reserve raised its base rate by 0.75 basis points on Wednesday, marking its third straight hike.

Rising interest rates lead to higher mortgage payments, which is not good news for the housing market. But lower house prices are part of what is needed to keep inflation down.

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Fed Chairman Jerome Powell said Wednesday: “Over the long term, we’ll see house prices rise at a reasonable level and at a reasonable pace, aligning demand and supply better to allow people to buy homes again. “Perhaps the housing market will have to go through an adjustment to get back to where it was.”

“From a sort of cyclical perspective, this difficult correction should bring the housing market back into better balance.”

These words may sound frightening, especially to those who went through the last financial crisis when the housing market went through a very difficult correction.

But experts say there is good reason to believe that there will be no return to 2008, whatever the circumstances.

higher lending standards

Questionable lending practices in the financial industry were a major factor leading to the 2008 housing crisis.

So the housing market collapsed when more and more borrowers were unable to repay their loans.

That is why the Dodd-Frank Act was enacted in 2010. The law imposed restrictions on the financial industry, including creating programs to stop mortgage companies and lenders from issuing risky loans.

Recent data suggests that lenders are indeed stricter in their lending practices.

The median credit score for newly originated mortgages in the second quarter of 2022 was 773, according to the Federal Reserve Bank of New York. By contrast, 65% of newly originated mortgage debt was to borrowers with credit scores above 760.

“Newly initiated mortgage credit scores remain very high, reflecting continued stringent lending standards,” the New York Federal Reserve said in its quarterly report on household debt and credit. I’m here.

homeowners in good condition

As home prices rose, homeowners built up more wealth.

Mortgage owners now have access to $2.8 trillion in additional equity in their homes compared to a year ago, according to mortgage technology and data provider Black Knight. This represents a 34% increase and the additional equity available to each borrower increased by more than his $207,000.

What’s more, most homeowners didn’t default on their loans, even at the height of the COVID-19 pandemic, when lockdowns sent shockwaves through the economy.

Of course, it was the mortgage forbearance program that saved struggling borrowers. They were able to suspend payments until they regained financial stability.

The results look great. The New York Fed said the percentage of outstanding mortgages that were 90 days or more past due stood at just 0.5% at the end of the second quarter, close to historic levels.

supply and demand

On a recent episode of The Ramsey Show, host Dave Ramsey pointed out that the big problem in 2008 was “a tremendous oversupply as foreclosures went everywhere and markets froze.”

And the crash wasn’t caused by interest rates or the health of the economy, but rather by the “real estate panic.”

Demand for housing is still strong today, but supply is still in short supply. This dynamic could start to change if the Federal Reserve attempts to raise interest rates to curb demand.

Ramsey concedes that the current rate of home price inflation is slowing, but he doesn’t expect a crisis like 2008’s.

“It’s not always as simple as supply and demand, but most of the time it is,” he says.

This article is for information only and should not be construed as advice. It is provided without warranty of any kind.

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