The Fed is resetting the housing market with a ‘hard correction’ – 5 things to know about the plan
“I would say if you are buying a home, or someone or a young person looking to buy a home, you need a little bit of Reset. “We need to get back to a place where supply and demand come back together and where inflation is down again, and mortgage rates are down again,” Powell told reporters at the time.
In the months that followed, economists openly questioned what Powell meant by a housing “reset.” Does the Fed simply want buyers to hold back long enough to allow stocks to rise? Or does the “reset” mean that the Fed also wants home prices – which have risen 43% in just over two years?
On Thursday, CNN business correspondent Nicole Goodkind asked Powell to clarify what housing “reset” means. here it is long response.
“When I say reset, I’m not looking at a particular set of data. What I’m really saying is that we’ve had time in a frenetic housing market across the country, where popular homes were selling to first buyer 10% above demand before even seeing the home. of things. So there was a huge imbalance between supply and demand. Houses were rising at an unsustainable level. So the slowdown in home prices we’re seeing should help bring prices closer to rents and other housing market fundamentals. That’s a good thing. Long term In the long run, what we need is for supply and demand to align better so that housing prices rise at a reasonable level and at a reasonable pace so that people can buy homes again. Perhaps in the housing market we have to make a correction to get back to that place. There are also long-term problems with the housing market You know, it’s hard to find a lot now near cities, so builders have a hard time zoning, lots, workers, materials and things like that. But from a business cycle point of view, it’s hard [housing] Powell told reporters on Wednesday that the correction should return the housing market to a better balance.
While Powell did not give a direct answer, he did give us clues about where to “reassign” federal housing to the US housing market.
1. We’re in ‘Tough [housing] revision”
Not long after the Federal Reserve began applying upward pressure this spring on interest rates, the housing market flipped into a lull. While the slowdown started moderate, it has since intensified. On an annual basis, new home sales and existing home sales are now down 29.6% and 19.9%.
This sharp slowdown in the housing market is not a normal market – it is a correction in the housing sector. At least that’s according to Powell.
“In the long run, what we need is for supply and demand to align better so that home prices rise at a reasonable level and at a reasonable pace so that people can buy homes again. Perhaps in the housing market we will have to go through a correction until we get back to the bottom line,” Powell said on Wednesday. That place.” “This is hard [housing] The correction should bring the housing market back to a better balance.”
This residential patch, of course, has already begun. In May, Moody’s Analytics chief economist Mark Zandi said luck Rising mortgage rates coupled with housing price foam would push the US housing market into a housing correction. The housing correction is the period when the housing market — priced to 3% mortgage rates — works toward equilibrium. With homebuyers declining, Zandi says the housing correction will see inventory levels rise and home sales volumes decline. That would put much of the nation at risk of falling home prices, he said.
2. A “correction” on home prices puts downward pressure on home prices.
While Powell hasn’t come out to say it, many housing analysts believe the Fed’s “reset” is a symbol of falling home prices. A view also shared by luck.
“The Fed’s shift in word choice from ‘housing needs to reset’ in June to ‘housing reset today actually means a correction’ indicates that they are just fine with falling home prices, declining home sales, and declining construction.” In order to investigate, says Rick Palacios Jr., Head of Research at John Burns Real Estate Consulting luck.
Already, we’ve seen housing markets across the West slip into home price corrections. According to Zillow, 117 regional housing markets experienced a decline in home values between May 2022 and August 2022. This includes high-cost tech centers such as San Jose (down 10.6%) and San Francisco (down 7.8%). It also includes bubble markets such as Austin (down 7.4%), Boise (down 5.3%), Denver (down 4.3%), Las Vegas (down 2.3%), and Phoenix (down 4.4%).
The reason why we are vulnerable to falling home prices is very simple. The pandemic housing boom has seen housing prices rise across the country well above what incomes have historically supported. In some markets, such as Phoenix and Las Vegas, this reflects the levels they reached during the housing bubble of the 2000s. On Wednesday, Powell told reporters that a housing market correction could help balance those fundamentals.
“The longer that [mortgage] Prices remain high, we see housing will continue to feel and you will have that reset mode. And the affordability reset mechanism that must now occur is in the works [home] the prices. Thus, there are a lot of markets across the country where we expect home prices to drop more than 10%,” Palacios says. luck.
3. “Correct” housing for broken fever. It must restore balance.
This summer, Federal Reserve researchers released a research paper Finding that the pandemic housing boom was driven by increased demand – not supply constraints.
“Although the supply of new listings for sale declined sharply at the start of the pandemic, we show that reduced supply was a secondary factor to increased demand in explaining the tightening of housing markets during the pandemic’s first year,” Fed researchers wrote. “We estimate that new construction would have had to increase by approximately 300% to accommodate the increased demand in the era of the pandemic.”
The ongoing correction in the housing sector has halted the demand boom. Once mortgage rates moved north of 5%, work-from-home buyers began guessing moves into markets like Austin and Boise. Other groups of buyers who helped drive the pandemic housing boom, such as flippers and second-home buyers, also retreated.
The Fed’s fight against inflation will not help address the nation’s housing deficit. Still, by sidelining higher demand in the event of a pandemic housing boom, the Fed could help return some “equilibrium” to the market.
4. The housing market correction will soon spread throughout the economy.
The Fed housing reset isn’t just about housing. It’s about taming inflation.
“Housing is a primary transmission mechanism for the Fed, and its monetary tightening is intended in part to cool the housing market as part of the Fed’s efforts to fight inflation,” said Odita Koshi, deputy chief economist at First American, a real estate financial firm. service company.
Across the world, central banks are putting upward pressure on long-term interest rates – including mortgage rates – by signaling that short-term interest rates will stay high for longer. As mortgage rates rise, home sales and home construction decline. This reduces demand for services such as housing loans and mobile crews. It also causes lower demand for goods (such as wood) and durable goods (such as refrigerators). These economic contractions then spread throughout the economy and, in theory, helped weaken the labor market and reduce inflation.
It is clear that the housing market has already weakened. However, we are still in the early stages of this weakness spreading across the rest of the economy.
5. The Fed’s mandate is not housing.
The Federal Reserve has a dual mandate from Congress: to maintain “maximum employment” and “price stability.” But as long as inflation remains above the Fed’s 2% target, Powell says the latter will be the central bank’s main focus. Even if it means pushing the economy into recession to make it happen.
Ideally, Powell would like to see the federal housing “reset” bringing us back to a balanced housing market. However, at the end of the day, the Fed’s mandate is not to make sure housing prices are affordable. If inflation turns out to be constant, one can expect a scenario where the Federal Reserve pushes so hard into the housing market that new construction falls. If that happens, it will likely send us into the kind of stagflation that eliminates inflation. However, it could exacerbate the housing shortage in the country. This would not be the kind of balance that potential buyers are looking for.
“Since April, we have been informing clients that the Fed’s intentions have been to dump housing demand under the bus, somewhat as a victim to help control inflation,” Palacios says. luck.
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