- The Fed’s interest rate hike would give the housing industry a “reset” but brings uncertainty.
- Fed Chairman Powell said in the effort to cool “red-hot” housing market, it takes a “difficult correction.”
- Expert: Housing inventory will remain tight in the coming months, even the next few years.
The Federal Reserve’s rate hikes may have been intended to give the housing industry a “reset,” as Chairman Jerome Powell wanted, but it may have also left home buyers and sellers further confused about what to do.
Average 30-year fixed mortgage rates have risen from 3.2% to 6.38% in the past six months, tightening supply as sellers hang on to those early, historically low rates. But the demand for housing of all kinds still remains high nationally.
On Wednesday, Powell, in an effort to cool “a red-hot housing market” to correct a “major imbalance,” now believes it will likely take a “difficult housing correction” to fix things.
“For the longer term, what we need is supply and demand to be better aligned so that housing prices go up at a reasonable level and at a reasonable pace and people can afford homes again,” Powell told reporters Wednesday.
With that in mind, here are what various experts think could lie ahead.
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Will US Home Prices Fall?
Mark Zandi, chief economist at Moody’s Analytics expects year-over-year growth in US home prices to drop from 20% to 0% by this time next year.
Zandi believes the housing market is already in a correction, which could increase home inventory as sales volume declines.
He said there are now 210 of the top 400 housing markets across the country that are “significantly overvalued” — or overvalued by more than 25%.
“I think this is going to play out over the next couple of years, and it’s going to take half a decade for things to go down,” Zandi tells USA TODAY.
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Could house prices drop sooner?
Maybe. Already in the fall, Neda Navab, president of brokerage operations at real estate firm Compass in New York, believes that sellers “may come back with a more realistic view on pricing as they realize the pedal-to-the-metal days of last summer are over.”
Even Powell isn’t sure.
“We will probably have to have a correction in the housing market to get back to that place (lower prices), said Powell. “But from an economic point of view, this difficult correction should bring the housing market back into better balance.”
When will the housing inventory increase?
Housing inventory will remain tight for the next few months and even for the next couple of years, according to National Association of Realtors Chief Economist Lawrence Yun.
“Some homeowners are unwilling to trade or trade after locking in historically low mortgage rates in recent years, increasing the need for more new construction to boost supply,” Yun said.
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Will inflation cause housing prices to rise?
To reduce inflation, consumers must slow down consumption. Buying new or existing housing increases consumption of “more tangible hard goods and that creates demand and that drives inflation and prices,” Graziano said.
He added that every home sale (from paying realtors, moving, buying furniture, appliances) across the country adds tens of thousands of dollars to the nation’s economy, an economy that the Fed is trying to slow down.
“Our economy is negatively affected when we stop spending, but how do you stop spending without killing the economy?” Graziano said. “That’s the crossroads the Fed is at.”
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Will we have another housing crash?
Zandi said the housing market is nowhere near the housing market crash during the 2008 Great Recession.
Graziano said there won’t be a housing crash primarily because of new lending rules resulting from the 2008 meltdown.
“That’s because (US) households are economically stronger than they were in 2006, prior to that crash,” he said. “That’s a good sign, because with the Fed, the goal here is not to break the economy, but to slow things down. Otherwise, it will break the housing market.”