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, which was more recently offset by the Federal Reserve’s attempt to contain inflation by raising interest rates. The central bank’s efforts have resulted in a sharp rise in mortgage rates, a fall in the number of homes on sale and a record slowdown in monthly price growth of 2.6 percent in September.

A correction would allow buyers to spend more time in the market and potentially face less home competition, but experts say recent price declines may not be enough to offset high mortgage rates combined with historic price increases during the pandemic.

National housing market corrections are rare, economists told The Hill. While there is no hard and fast definition, experts say the market is in a correction when changing conditions cause property prices to fall.

“We’re seeing this now that national home values ​​have fallen somewhat from their June peak, part of a rebalancing of the housing market as potential buyers pull back on rising costs and sellers respond by lowering their listing price or accepting a lower offer for their home Zillow senior economist Jeff Tucker told The Hill in an email.

“But home values ​​are a long way from a 10% drop from the national highs,” Tucker said, noting that a stock market correction refers to a 10% or more drop from the highs.

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

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

“Due to pandemic-related distortions, real estate prices have risen at a historic rate in recent years. This has led to many markets across the country being considered overvalued,” Maleyev said.

“More than half of the country’s real estate markets are overvalued as of the middle of this year, according to Moody’s research. This leaves plenty of room for these markets to see their home prices come back down to earth,” she added.

Some of these price drops have been seen on subways, where prices have skyrocketed during the pandemic, and particularly those where long-distance workers have flocked because of a lower cost of living.

Data released last week by the National Association of Realtors showed that home prices rose in most US metropolitan areas in the most recent quarter. Seven of the top 10 metropolitan areas with the biggest price gains were in Florida, where the typical price jump was more than 18 percent, and half of the country’s most expensive markets were in California.

Nationwide, prices for an existing single-family home at the median price rose 8.6 percent year-over-year to $398,500, despite the current price slowdown.

Although buyers are seeing some relief from modest price declines, rising mortgage rates are pushing home ownership beyond the reach of many Americans.

Mortgage rates have more than doubled since the US Federal Reserve began its series of aggressive rate hikes. The interest rate on a 30-year fixed-rate mortgage climbed back above 7 percent last week after falling slightly a week earlier.

Those rates are driving payments up, and recent data shows average monthly mortgage payments are up almost 50 percent from pre-pandemic levels.

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

Federal Reserve Chair Jerome Powell told reporters after the central bank’s latest rate hike earlier this month that the agency was aware of the negative impact of the Fed’s activities on the housing market.

“Housing will be severely impacted by these higher interest rates, which are truly back to pre-global financial crisis levels. They’re not historically high, but they’re much higher than they’ve ever been,” Powell said. “We understand that there really is a very big impact of our policies.”

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

“The first is that any drop in home prices hasn’t fully offset the rise in mortgage rates, so homebuyers’ monthly mortgage payments are still much higher than they were at the beginning of the year when rates were lower,” Marr said in an E- Mail.

“If house prices fall far enough to offset the rise in interest rates, it will also discourage buyers from buying a house that is declining in value – no one wants to catch a falling knife and risk being the bigger fool,” he added.

Still, there could be a bright spot for buyers, even as high mortgage rates negate some of the positive impact of price declines.

“This small drop in price does not help buyers to break through. The impact of higher mortgage rates far outweighs the impact of slightly lower rates,” 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 evaluate their options, a marked change from last year when bidding wars were the norm.”

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