“If you’re a homebuyer, looking to buy a home, or a young person, you need a little information. resetWe need to get back to where supply and demand are coming together again, inflation is low again and mortgage rates are low again. ” At the time, Mr. Powell told reporters:.
Since then, economists have openly questioned what Powell meant by a housing “reset.” Does the Fed simply want to keep buyers down long enough for inventories to rise? Or does a ‘reset’ mean the Fed wants house prices too? ?43% surge in just over two years-get off?
“When I say reset, I’m not looking at a particular set of data. I mean, there was a time when the national housing market was notorious for being overheated, so there was a big imbalance between supply and demand. So the slowdown in house prices that we’re seeing should help move prices closer to rents and other housing market fundamentals. need to better align supply and demand for housing prices to rise at a reasonable level and at a reasonable pace so that people can buy homes again. The housing market also has a long-term problem: as you know, it is currently difficult to find land close enough to the city, so construction Contractors struggle to get zoning, land, workers, materials, etc. But from a business cycle perspective, this is difficult. [housing] The correction should bring the housing market back into better balance,” Powell told reporters Wednesday.
Powell didn’t give a straight answer, but he did provide some clues as to where the Fed’s housing ‘reset’ could lead the US housing market.
1. We are ‘in a difficult situation’ [housing] Fix”
Shortly after the Federal Reserve started Upward pressure on interest rates this spring, Housing market enters cooldown modeThe slowdown started mildly but has since intensified. year-on-year, new home sale When Sale of existing homes It is now down 29.6% and 19.9%.
That sharp housing slowdown is not a normalized market —Correction of housingAt least, according to Powell.
“Over the long term, supply and demand will need to be better aligned for housing prices to rise at a reasonable level and at a reasonable pace so that people can afford to buy homes again. , will have to go through an adjustment to get back to where it was,” Powell said Wednesday. “This difficult [housing] The adjustment should return the housing market to a better balance. “
Of course, this housing correction has already begun. Back in May, Moody’s Analytics chief economist Mark Zandy said: luck Soaring mortgage rates and bubbled home prices Will drive the US housing market into a housing adjustmentThe housing adjustment is a period during which the housing market works towards equilibrium with mortgage rates set at 3%. As homebuyers retreat, Zandi said the housing adjustment will push up inventory levels and lower home sales volumes. it also said, put much of the country at risk of falling house prices.
2. Housing “adjustment” puts downward pressure on housing prices.
Powell did not speak, but many housing analysts believe the Fed’s housing ‘reset’ is the code for falling house prices.a also share views luck.
“It is clear that the Fed has changed its word choice from ‘housing needs a reset’ in June to ‘housing reset actually means adjustment’ today, as house prices fall and home sales has cooled off, indicating that construction is on track to reach its target with a significant reduction in construction. Rick Palacios Jr., Head of Research, John Burns Real Estate Consulting, said: luck.
We have already seen the western housing market turn to house price correction.according to Jiro, From May 2022 to August 2022, 117 local housing markets will see home price declinesThis includes high-cost tech hubs such as San Jose (down 10.6%) and San Francisco (down 7.8%).Also included merry market These include Austin (down 7.4%), Boise (down 5.3%), Denver (down 4.3%), Las Vegas (down 2.3%) and Phoenix (down 4.4%).
The reason for the vulnerability to falling home prices is very simple. pandemic housing boom House prices across the country soared far beyond the levels that had previously supported incomes. In some markets such as Phoenix and Las Vegas, Reflects the levels of the housing bubble of the 2000sOn Wednesday, Powell told reporters the housing adjustment could help balance those fundamentals.
“The longer it is [mortgage] We think housing will continue to feel it and be in this reset mode as interest rates continue to rise.And there’s an affordable reset mechanism on that must happen now [home] price. So there are a lot of markets across the country where he expects home prices to drop by double digits,” Palacios said. luck.
3. “Compensation” of the housing broke the heat. That should bring the balance back.
This summer, researchers from the Federal Reserve published a paper Pandemic housing boom was driven by surge in demand, not supply constraints, finds.
“Despite a sharp decline in the supply of new properties for sale at the beginning of the pandemic, the decline in supply compared to the increase in demand may help explain the tightening of the housing market in the first year of the pandemic. It shows that it was a small factor.” A Federal Reserve researcher wrote“Our estimates suggest that new construction would have needed to increase by about 300% to absorb the surge in demand during the pandemic.”
The ongoing housing adjustment has halted that demand boom. As mortgage rates climbed above his 5%, work-at-home buyers began rethinking moves to markets like Austin and Boise. Other buyer groups that helped fuel the pandemic housing boom, such as flippers and second-home buyers, have also pulled out.
The Fed’s inflation struggle won’t help address the country’s housing shortage. But putting aside the surge in demand from the pandemic housing boom will help the Fed restore ‘balance’ to the market. There is a possibility.
4. The correction in the housing market will soon spread throughout the economy.
The Federal Reserve’s housing adjustment isn’t just about housing. is to keep inflation down.
“Housing is a key delivery mechanism for the Federal Reserve, and its monetary tightening is part of the Federal Reserve’s anti-inflation measures to boost the housing market,” said Odeta Kushi, deputy chief economist at real estate finance firm First American. It’s partly intended to cool,” he said. service company.
Central banks around the world are putting upward pressure on long-term interest rates, including mortgage rates, by signaling that short-term rates will remain elevated for an extended period of time. As mortgage rates rise, home sales and home construction fall. This reduces demand for services such as mortgages and movers. Demand for commodities (such as wood) and durable goods (such as refrigerators) will also drop. These contractions would then spread throughout the economy and, in theory, would weaken the labor market and help keep inflation in check.
The housing market is already clearly weakening. but, We are still in the first innings of that weakness spreading to the rest of the economy.
5. The Federal Reserve’s mandate is not housing.
The Federal Reserve has two mandates from Congress. It is to maintain “maximization of employment” and “stabilization of prices.” But as long as inflation stays above the Fed’s 2% target, the Fed’s main focus will be on the latter, Powell said. Even if it means pushing the economy into recession to achieve it.
Ideally, Powell would like the Fed’s housing “reset” to return to a balanced housing market. It’s not about confirming that there is. If inflation proves to be robust, we could foresee a scenario in which the Federal Reserve boosts the housing market very strongly and new construction plummets. That would likely lead to a recession of the type that would stave off inflation. But it could exacerbate the country’s housing shortage. That’s not the type of balance that prospective buyers are looking for.
“Since April, we have been telling clients that the Fed’s intention is to throw housing demand under the bus, like a sacrificial lamb to control inflation,” Palacios said. . luck.