The scorching pandemic-era U.S. housing market is poised for a price correction ‘coast to coast’ as the Federal Reserve hikes interest rates, a prominent warned this week. economist.
Mark Zandi, chief economist at Moody’s Analytics, said his firm expects home prices to fall in key competitive markets that are the “juiciest” or overvalued. The expected price cuts coincide with a massive increase in mortgage rates that has undermined the purchasing power of future homeowners.
The slowdown will likely impact the cities of Phoenix and Tucson in Arizona as well as North and South Carolina and parts of Florida, according to the company’s analysis. A key city that will be affected is Boise, Idaho, which Moody’s has identified as “the most overvalued market in the nation.”
Zandi warned of the impending housing market correction during a speech at a bipartisan housing policy summit in Washington, DC, according to Bloomberg.
Cheap mortgage rates, a lack of housing inventory and soaring interest during COVID-19 shutdowns have driven house prices soaring in recent years – a trend that is expected to slow as the Fed tightens. its policy and that mortgages are approaching 6%.
While the Fed’s benchmark interest rate has no direct impact on mortgages, all forms of credit and borrowing are becoming more expensive pending tighter fiscal conditions. The central bank is raising its rates sharply in order to fight against inflation, which has reached its highest level in decades.
Rising interest rates “have already slowed the housing market,” Jacob Channel, senior economist at Lending Tree, told The Post.
“Fewer people are getting mortgages, homes are staying on the market longer and some sellers are cutting prices,” Channel said.
“That said, we are coming out of a period in 2020 and 2021 where the housing market was extremely hot, so this current ‘correction’ is neither unexpected nor necessarily a bad thing – especially since it will give a little time to some buyers. more leeway when looking for accommodation,” Channel added.
The 30-year mortgage rate hit 5.81% this week, up from just 3.02% the same week a year ago, according to data from Freddie Mac.
As mortgage rates rise, the demand for loan applications among potential buyers or homeowners looking to refinance has hit a 22-year low.
So far, the rate hike has yet to have a major impact on prices.
The National Association of Realtors said the median sale price for existing homes was $407,600 in May, up 14.8% from a year ago. However, sales of existing homes fell 3.4% for the month, indicating a drop in demand.
Larry Botel, senior real estate adviser at Solomon Partners, said a housing correction is inevitable and “has already started to happen”.
“Your average homebuyer can’t afford to pay the same amount they could, so prices have to adjust,” Botel said. “The same math will also continue to benefit the rental market as it will continue to be an option for price-conscious buyers.”
A drop in house prices would align with the Fed’s plan to lower prices. Shortly after the Fed raised its benchmark interest rate by three-quarters of a percentage point for the first time since 1994, Fed Chairman Jerome Powell acknowledged the rapid changes in the housing market.
“I would say if you’re a homebuyer, someone, or a young person looking to buy a home, you need a bit of a reset,” Powell said. “We need to get back to a place where supply and demand are back together and inflation is low again and mortgage rates are low again.”
While lower prices in key markets are likely, Zandi has played down the possibility of a radical housing slump on par with what happened during the subprime mortgage crisis of 2008 – when practices risky lending led to a market crash. Price drops should be relatively small.
Zandi noted that available inventory is still historically tight, with vacancies at historic lows this time around rather than the all-time highs posted during the last crash. Mortgages are also much more stable than ten years ago.
“I just don’t see the kind of mortgage defaults and distressed sales that would be needed for a big drop in home values. That’s when you have crashes, when you have a lot of foreclosures and a lot of struggling sales,” says Zandi. “It just won’t happen.”