Home News The Fed plans to ‘reset’ the housing market—raising the likelihood of falling home prices

The Fed plans to ‘reset’ the housing market—raising the likelihood of falling home prices

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Not only that How expensive a house has become— It’s the speed to get there.that’s all It took 24 months for U.S. home prices to rise a staggering 37%.. For comparison, the largest two-year surge leading to housing collapse in 2008 was 29%.

Towards this spring The Federal Reserve has determined that it has seen enough.. The central bank immediately raised interest rates. Average 30-year fixed mortgage rates rise to 6%— Increased from 3.2% at the beginning of the year. These higher rates, which have reduced the prices of many home shoppers, Eventually ended the pandemic housing boom..Now we are in a sharp slowdown and the Mortgage Bankers Association reports on Wednesday: Mortgage applications are down 16% year-on-year...

There was little contact from the Fed when this shift happened.Well, that was up to Chair Jerome Powell addressed reporters on Wednesday..

Here’s what Powell had to say: [home] Prices have risen significantly over the past few years. So now it changes. And the price went up. We are well aware that mortgage rates have risen significantly. And you are looking at the changing housing market. I’m watching what happens. How much does it really affect housing investment? I’m confused. How much does it affect home prices? I’m confused. Obviously, we are watching it very carefully … it’s a very tight market. Therefore, even in a world where prices are rising, prices may continue to rise for some time. So it’s a complicated situation and we’re watching it very carefully.If you’re a home buyer, someone, or a young person trying to buy a home, I think you need a little reset.. We need to return to where supply and demand will recover, inflation will fall again, and mortgage rates will fall again. “

Three things stand out.

1. Powell said that homebuyers are “a little reset“”

In the housing industry, the total number of active lists is called “inventory.” Since 2014, annual inventory levels have declined. This was partially driven by changing household preferences (ie, staying longer). Low levels of housing construction after the collapse of housing in 2008, And the beginning of the first millennial home purchase. However, when the pandemic housing boom began, inventory levels began to skyrocket. By the spring of 2021, inventories had reached their lowest level in 40 years. It gave homebuyers little choice other than bidding on home prices.

It’s clear what Powell wants Housing cooldown caused by rising mortgage rates Helps raise inventory levels. Powell believes it will help the buyer. As shoppers resume their search for homes, they will encounter a more friendly market. The higher the inventory level, the more time the buyer has to make decisions and the less likely he or she will have to participate in a bid war.

Even before the Federal Reserve intensified the fight for inflation, HousingWire’s chief analyst, Logan Mohtashami, was openly backing higher mortgage rates as a way to raise inventory levels. According to the National Association of Real Estate Agents U.S. home inventories reach 1.03 million towards May.. But to return to the “normal” housing market, inventory needs to increase from 1.52 million to 1.93 million, Mohtashami says. However, national inventory levels (see graph below) are rising rapidly, with more than half of the regional housing market still holding inventory levels 50% below pre-pandemic levels.

View this interactive chart on Fortune.com

“We need a balance … the housing market is still terribly unhealthy, as total inventory levels in the United States are still below 1.52 million,” says Mohtashami.

2. Falling house prices?Powell seems to have suggested that it is possible

Federal Reserve Chair Powell raised the hypothesis of falling home prices on Wednesday. Supply of unfinished homes in the housing market, and as they come online … “

After that, he pivoted and said: Interest rates are rising. So it’s a complicated situation and we’re watching it very carefully. “

For a moment, Powell sounded like he was saying house prices would go down. Anyway, Powell did not rule out falling home prices. That’s important. Historically, outside of the Great Depression, year-on-year declines in home prices rarely occur after the collapse of homes in the 2000s. But today’s situation could lead us to a rare time when home prices actually fall. Powell said he didn’t close the door about the possibility of falling home prices, instead saying “we’re watching it very carefully.”

last month, Moody’s Mark Zandi, Chief Economist of Analytics luck That soaring mortgage rates pushed us up For full-scale “house correction”. In the near future, Zandy expects house prices to rise from 20.6% to 0% year-on-year. He expects home prices to fall 5% to 10% in the significantly “overrated” housing market. In the event of a recession, Moody’s Analytics said it expects US home prices to fall by 5% and the significantly “overvalued” home market to fall by 15% to 20%. ((((Moody’s Analytics has decided to “overestimate” By comparing local home prices with those historically supported by the underlying economic fundamentals of the region, such as household income).

View this interactive chart on Fortune.com

Why are house prices so likely to fall?It starts with the fact that home prices Has been separated from the underlying economic fundamentals.. Basic economic theory teaches that house price growth and income growth are interwoven, neither of which can overtake the other for a long time. That affordable crisis was exacerbated only by soaring mortgage rates. actually, Over the last 6 months, typical new mortgage payments have skyrocketed by 52%According to real estate analysis company Zonda.

However, home prices can fall, which requires significant inventories. According to Mohtashami, home prices could begin to fall nationwide year-on-year when US inventory levels exceed 2 million units.

If the Federal Reserve’s “excessive tightening” causes a recession, Ralph McLaughlin, chief economist at real estate data and analytics firm Kukun, will reach levels where inventories allow home prices to fall. It states that there is a possibility.

“It’s more and more likely that we’re approaching a sharp turning point in the market,” McLaughlin said. luck..

3. Powell clearly stated that he wants mortgage rates to go down.

Central Bank Raised interest rates to stop the pandemic housing boom And to curb runaway inflation. As the Fed becomes able to curb inflation, rising mortgage rates could begin to recede.

View this interactive chart on Fortune.com

That said, homeshoppers eager to ease mortgage rates may have been waiting for a while. As of last week Consumer price index It was 8.6%. The Fed will not give up the fight for inflation until the consumer price index returns to 2%. On Thursday, the Fed revealed that the fight could continue until 2024.

Are you hungry for more housing data? Follow us on Twitter @NewsLambert..

This story was originally Fortune.com

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