Chief Economist Mark Zandi says the housing market has just slipped into a complete correction
Mark Zandi, chief economist at Moody’s Analytics, is ready to call. Says luck That we’ve officially moved from the housing boom to the “housing patch.”
Real estate data for April and May shows that the US housing market is declining. New home sales fell 19% to the lowest level since April 2020. Redfin reported that 19% of home listings reduced their prices over the past month. Inventory is rising rapidly, while mortgage applications and existing home sales are also declining.
This decline is not a seasonal result or a weak month or two. Zandi says he has turned tack: Demand is falling — fast — in the face of skyrocketing mortgage rates.
“The housing market has peaked…everything points to a housing market reversal,” says Zandi. “In terms of home sales, they are dropping sharply. Housing demand is dropping rapidly. Home price growth [will] go flat here very quickly; We’ll see [home] Low prices in a large number of markets.
Unlike a stock market correction, which means a drop of more than 10% in stocks, Zandi says a “housing correction” means the end of the housing boom and the beginning of a period in which home prices are falling in some regional markets. Over the next 12 months, year-over-year home price growth is expected to be 0%. If it pays off, it will be the worst 12-month stretch since 2012. It will also be a huge blow to real estate agents and brokers who have seen home prices rise 19.8% over the past year.
This is all by design. The Federal Reserve has a dual mandate from Congress: to keep unemployment and inflation low. Of course, with the unemployment rate at 3.6% and the latest CPI reading at 8.3%, it’s clear what the Fed should turn its attention to: inflation. In the opinion of the Federal Reserve, if it can end the housing boom, it could slow overall price growth. For this The Fed hit the housing market with an economic shock Mortgage rates are rising.
The housing market has historically been ‘overvalued’.
Zandi says the Fed won’t be satisfied once home sales slow. It also wants to slow down the construction of homes. Soaring home construction, which this year reached its highest level since 2006, has put increased pressure on everything from wood to steel to kitchen countertops. If the housing market heats up before inflation can be tamed, Zandi says, the Fed will simply push mortgage rates higher. Already, over the past five months, the average 30-year fixed-rate mortgage rate has risen from 3.11% to 5.1%.
To be clear, Zandi doesn’t see a 2008-style housing crisis or a foreclosure crisis. While the rise in mortgage rates has pushed the housing market to the limits of affordability, we don’t have the credit problems that plagued last time. Homeowners are better off financially than they were in the run-up to the 2008 financial crisis. This time, says Zandi, we also don’t have mortgages on a large scale. Also, if home prices nationwide start to fall, he says, the Federal Reserve can always ease mortgage rates.
However, Zandi says that some regional housing markets have historically become “overrated” and could see home prices fall 5% to 10% over the next year. Zandi says that if there is a recession, the drop in prices in those markets could grow to anywhere from 10% to 20%.
View this interactive infographic on Fortune.com
Of the country’s 392 largest housing markets, 96% have “overpriced” homes relative to what local incomes can support. This is the finding from Moody’s analysis of US housing markets. Of those 392 markets, 149 are overvalued by at least 25%. That includes Boise, where home prices are 73% higher than what Moody’s says supports economic fundamentals.
Zandi says that highly “overvalued” housing markets such as Boise and Phoenix are at high risk of falling home prices over the next year. As well as numerous markets throughout the Mountain West, Southwest, Old South, Carolina, Florida and Texas.
While Zandi said he doesn’t think home prices nationwide will fall, he says they will likely see a “real” drop in home prices. This is economic talk about inflation growing faster than US home prices.
“Inflation will remain positive. If inflation is 8% and home prices are nowhere to be found, home prices will fall by 8% in real terms,” says Zandi. Now that home prices are “overestimated,” we are about to enter a period in which income growth and inflation outstrip home price growth, he said. For home shoppers priced through the pandemic housing boom – which has seen US home prices rise 34.4% since February 2020 – this isn’t exactly bad news.
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This story originally appeared on Fortune.com