What a housing market correction could mean

What a housing market correction could mean

The US housing market may be heading for a correction after more than two years of massive price growth that was more recently offset by the Federal Reserve’s attempt to rein in inflation by raising interest rates. The central bank’s effort led to a sharp rise in mortgage rates, a drop in the number of homes under contract and a record monthly slowdown in price growth in September of 2.6%.

A correction would allow buyers to spend more time on the market and possibly have less competition for homes, but experts say recent price cuts may not be enough to offset high mortgage rates combined with increases historic prices during the pandemic.

National housing market corrections are rare, economists told The Hill. Although there is no set definition, experts have said that the market is in a correction phase when changing conditions cause house prices to fall.

“We are seeing that now that home values ​​nationally have fallen a bit from their June peak, this is part of a rebalancing of the housing market as potential buyers pull back due to soaring costs and that sellers respond by lowering their list price or accepting a lower offer on their home,” Zillow senior economist Jeff Tucker told The Hill in an email.

“But home values ​​are nowhere near a 10% decline from peak levels nationally,” Tucker said, noting that a stock market correction refers to a decline of 10% or more. compared to peak levels.

Average home prices fell 0.4% in September to $358,283 from their June peak of $359,719, Zillow data showed.

Yelena Maleyev, an economist at KPMG Economics, told The Hill in an email that recent price declines can be viewed in the context of unusually rapid price growth over the past two years.

“Due to pandemic-related distortions, house prices have risen at a historically rapid rate over the past few years. This has led to many markets across the country being viewed as overvalued,” Maleyev said.

“According to Moody’s research, more than half of the country’s real estate markets are overvalued at the middle of this year. This leaves a lot of room for those markets specifically to see their home prices come back down to Earth,” she added.

Some of these price cuts have been seen in metros where prices have skyrocketed during the pandemic, and particularly those where remote workers have flocked to reduce the cost of living.

Data released last week by the National Association of Realtors showed home prices rose in most US metros in the last quarter. Seven of the top 10 metros with the highest price increases were in Florida, where the typical price increase was more than 18%, and half of the country’s most expensive markets were in California.

Nationally, prices for an existing median-priced single-family home rose 8.6% from a year ago to $398,500, despite the current price downturn.

Although buyers are seeing some relief after a slight drop in prices, soaring mortgage rates continue to put homeownership out of reach for many Americans.

Since the Federal Reserve began its series of aggressive interest rate hikes, mortgage rates have more than doubled. The rate on a 30-year fixed-rate mortgage rose above 7% again last week after falling slightly a week earlier.

These rates are driving up payments, and recent data shows average monthly mortgage payments are up nearly 50% from pre-pandemic levels.

Average monthly payments increased by more than $600, bringing the monthly payment for a typical single-family home to $1,840 after a 20% down payment.

Federal Reserve Chairman Jerome Powell told reporters following the central bank’s latest interest rate hike earlier this month that the agency was aware of the negative impact of the activity of the Fed on the real estate market.

“Housing is significantly affected by these higher rates, which are really back to where they were before the global financial crisis. They’re not historically high, but they’re much higher than they’ve been,” Powell said. “We understand that this is really where a very important effect of our policies lies.”

High rates also mean that a price correction may not be of major benefit to buyers for two main reasons, Taylor Marr, deputy chief economist at property firm Redfin, told The Hill.

“The first is that any decline in home prices so far has yet to fully offset the rise in mortgage rates, leaving homebuyers’ monthly mortgage payment still much higher than when rates were lower in the beginning. of the year,” Marr said in an email.

“If home values ​​start to fall enough to offset rising rates, buyers will also be deterred from buying a home that is falling in value – no one wants to catch a falling knife and risk being the biggest fool” , he added.

Still, there could be a silver lining for buyers, even if high mortgage rates offset some of the positive effects of lower prices.

“This small price drop does not help buyers break through. The impact of higher mortgage rates far outweighs the impact of slightly lower prices,” Tucker said.

“The silver lining for buyers is reduced competition rather than anything related to the cost of a home,” Tucker added. “Buyers who can overcome affordability hurdles and stay in the market will have less competition and more time to consider their options, which is a dramatic change from last year when the auctions were the norm.”

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