- The Fed’s interest rate hike is supposed to give housing industry a “reset,” yet brings uncertainy.
- Fed Chair Powell said in effort to cool “red-hot” housing market, it takes a “difficult correction.”
- Expert: Housing inventory will remain tight in the coming months, even for the next couple of years.
The Federal Reserve’s interest rate hikes may be intended to give the housing industry a “reset,” as chair Jerome Powell wanted, but it also may have further confused home buyers and sellers on what to do next.
Average 30-year fixed mortgage interest rates have spiked from 3.2% to 6.38% over the past six months, tightening supply as sellers hang on to those early, historically low rates. But the demand for housing of all types still remains high nationwide.
On Wednesday, Powell, in an effort to cool “a red-hot housing market” to straighten a “big 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 get better aligned so that housing prices go up at a reasonable level and at a reasonable pace and that people can afford houses again,” Powell told reporters on Wednesday.
With that in mind, here are what several experts think could lie ahead.
Will U.S. home prices drop?
Mark Zandi, chief economist from Moody’s Analytics expects year-over-year home price growth in the U.S. to bottom out 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 the volume of sales declines.
He said there are now 210 out of the top 400 housing markets across the country that are “significantly overvalued” — or overvalued by more than 25%.
“I think this will play out over the next couple of years, and it will be through mid-decade until things bottom out,” Zandi tells USA TODAY.
DOWNHILL TURN?:Home prices decline at rates seen close to a decade ago
Could home prices drop sooner?
Maybe. As early as fall, Neda Navab, president of brokerage operations at real estate company 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 have passed.”
Even Powell isn’t sure.
“We probably in the housing market have to go through a correction to get back to that place (lower prices), Powell said. “But from a business cycle standpoint, this difficult correction should put the housing market back into better balance.”
When will housing inventory increase?
Housing inventory will remain tight in the coming 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 up or trade down after locking in historically-low mortgage rates in recent years, increasing the need for more new-home construction to boost supply,” Yun said.
Will inflation cause housing prices to go down?
In order to slow inflation consumers have to slow consumption. Buying new or existing housing increases consumption of “more tangible hard goods and that creates demand and that drives inflation and pricing,” said Graziano.
He added that every housing sale (from either paying realtors, moving, buying furniture, appliances) across the country pours tens of thousands of dollars to the nation’s economy, an economy the Fed is trying to slow down.
“Our economy gets negatively impacted when we stop spending, but how do you stop spending without killing the economy?” Graziano said. “That’s the crossroads the Fed is at.”
AGGRESSIVE INCREASES:Fed hikes interest rate 0.75 percentage point to tame inflation, again
Will we have another housing crash?
Zandi said that the housing market is nowhere close to the housing market crash during the 2008 Great Recession.
Graziano said there won’t be a housing crash primarily because of new lending regulations resulting from the 2008 meltdown.
“That’s because (U.S.) households are more economically stronger than 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 slow things down. Otherwise, it will break the housing market.”