Home News The Fed’s housing market ‘reset’ isn’t letting up anytime soon—5 things to know heading into 2023

The Fed’s housing market ‘reset’ isn’t letting up anytime soon—5 things to know heading into 2023

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“There is room for interest rates to cover before we get to a sufficiently restrictive rate level,” Powell told reporters after the Fed’s fourth rate announcement. said.3/4 point rate hikes in a row federal fund rate.

That’s not exactly what builders and mortgage brokers wanted.

On the one hand, this latest hike shouldn’t send mortgage interest rate— Which financial markets price ahead of expected changes in financial conditions — spikes. On the other hand, this additional rate hike also means that financial markets aren’t about to crash mortgage rates.

In a press release, Powell acknowledged that continued quantitative tightening means more pain lies ahead for the US housing market.

“Housing is being hit hard by these high rates,” Powell said at a press conference. “The housing market needs to rebalance supply and demand. I have.”

what does that mean exactly?

to better understand where Sluggish housing market could head into 2023, so let’s take a closer look at recent Fed comments. Here are the 5 big points.

1. The Federal Reserve’s housing market ‘reset’ put us in a ‘tough situation’ [housing] Fix”

in June, Powell told reporters the U.S. housing market needed a “reset.”

“We saw [home] Prices have been rising very strongly over the last few years.That’s changed now…if you’re a homebuyer, looking to buy a home, or a young person, I think you need a little 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, Powell admitted he wasn’t sure how the “reset” would affect house prices. admitted to jeopardizing the housing market of “Difficult to fix”

according to Moody’s According to Analytics chief economist Mark Zandy, the housing correction is when the U.S. housing market, with mortgage rates hiked to 3%, heads toward equilibrium in the face of a spike in interest rates. Unlike the stock market, the housing correction is most acutely felt through a sharp drop in home sales. Having said that, Zandi says the amendment will also put downward pressure on house prices.

2. US house prices are falling for the first time since 2012. The Fed says this could be a “significant” downturn.

In June, Chairman Powell said, “I don’t know.” Soaring mortgage rates lead to lower housing prices.But on Wednesday, Powell said, “In some parts of the country, you [now] We are seeing a decline in housing prices. ”

The data confirm him.latest reading of Case-Shiller National Home Price Index shows that US house prices fell 1.3% between June and August.that is First decline nationwide since 2012.

“The other day [housing] While the market correction may be fairly mild, we cannot rule out the possibility that demand and house prices will fall significantly before the market normalizes. ” Fed President Christopher Waller told an audience at the University of Kentucky. in October.

Waller said this could lead to a “significant” decline in home prices.

How big is the “material” modification? Waller didn’t elaborate.

3. Pandemic Demand Boom Ends

Even as policy makers scrambled to rescue an economy with double-digit unemployment in the spring of 2020, the U.S. housing market was already booming.

This boom was offset by a surge in demand for housing. The urban wealthy wanted a second home to escape from the lockdown city. Remote workers, he realized, could eventually move deeper into the suburbs or leave for more affordable markets. Meanwhile, investors realized that the combination of rising house prices and historically low mortgage rates could make a lot of money in the housing market.

“The COVID-19 housing boom in the U.S. indicates that it was driven by an increase in demand… New construction typically accounts for about 15% of supply, so our estimate is that new construction will increase by about 300%. It shows that we needed to: to absorb the surge in demand during the pandemic era.” A Federal Reserve researcher wrote this summer.

That’s all. That demand boom has waned in the face of rising mortgage rates. The purchase of a second house is a big crash. A flipper called Timeout. And some prospective buyers were called back to the office.

This historic pullback in demand could help the housing market achieve Powell’s goal of “balance.” By temporarily setting buyers aside, the Federal Reserve can give inventories room for an upward adjustment.

4. The US mortgage-backed securities market is still ‘broken’

Any time Federal Reserve Goes Inflation Fighting Modemortgage interest rates rise.

That said, the rise in mortgage rates (which jumped from 3.09% to 7.3% over the past year) caught the industry off guard. Historically, mortgage rates have traded about 1.75 percentage points above the 10-year Treasury yield (currently 4%). Currently, that spread is around 3 percentage points. cause? As the Federal Reserve refrains from buying mortgage-backed securities, investors will —Those who assume that new borrowers will refinance in the future, resulting in lower earnings—I wasn’t keen on getting MBS securities.

This divergence between government bond yields and mortgage rates has caused some analysts to “The MBS market is broken.”

The Fed has not publicly commented on spreads, but Chairman Powell said in June he expects mortgage rates to eventually fall. What could be the cause? If the Fed succeeds in keeping inflation under control, it may hold off on rate hikes. Rising interest rates can also lead to a recession, which in turn causes the Fed to cut interest rates.

5. A ‘massive’ drop in house prices should not trigger a financial crisis like in 2008

Unlike the housing adjustment that began in 2006, Powell does not anticipate Amendment for 2022 cause a financial collapse.

“From a financial stability perspective, this cycle has not seen the poor underwriting that we saw before the Great Financial Crisis. Housing credit is much more carefully managed by lenders. It’s a very different situation. [in 2022]it shows no possibility, [well] There does not appear to be any financial stability issues.but we understand that [housing] That’s where our policies have a huge impact,” Powell said Wednesday.

Fed President Waller sent a similar message in October.

“Despite the risks material correction As for house prices, several factors help alleviate my concern that such adjustments could trigger a wave of mortgage defaults and destabilize the financial system. Waller told an audience at the University of Kentucky“For one thing, mortgage underwriting was relatively tight in the 2010s, so credit scores for mortgage borrowers today are generally higher than they were before the last housing adjustment. Adjustment experience has shown that most borrowers will default only if they experience a negative income shock in addition to being behind on their mortgages.”

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