The scorching pandemic-era US housing market is on the verge of a “coast to coast” price correction as the Federal Reserve hikes interest rates, a prominent economist warned this week.
Mark Zandi, chief economist at Moody’s Analytics, said his firm expects home prices to sink in key competitive markets that are the most “juiced” or overvalued. The projected price drops coincide with a massive surge in mortgage loan rates that have sapped the buying power of prospective homeowners.
The downturn will likely impact the cities of Phoenix and Tucson in Arizona as well as North and South Carolina and parts of Florida, according to the firm’s analysis. One key city set to be affected is Boise, Idaho, which Moody’s has identified as “the most overvalued market in the country.”
Zandi warned of the looming correction in the real estate market while speaking at a bipartisan housing policy summit in Washington, DC, according to Bloomberg.
Cheap mortgage rates, a lack of housing inventory and surging interest during COVID-19 lockdowns drove a steep spike in home prices over the last few years — a trend that is expected to slow as the Fed tightens policy and mortgages approach 6%.
While the Fed’s benchmark interest rate does not have a direct impact on mortgages, all forms of credit and borrowing are becoming more expensive on the expectation of tightened fiscal conditions. The central bank is sharply increasing rates in an effort to combat inflation that has reached its highest level in decades.
Rising interest rates “have already caused the housing market to slow down,” Lending Tree senior economist Jacob Channel told The Post.
“Fewer people are getting mortgages, homes are sitting on the market for longer and some sellers are cutting prices,” Channel said.
“With that said, we’re coming off a period of time through 2020 and 2021 where the housing market was extremely hot, so this current ‘correction’ is neither unexpected nor necessarily a bad thing — especially as it will give some buyers a bit more breathing room when they’re housing hunting,” Channel added.
The 30-year fixed-loan mortgage rate hit 5.81% this week, up from just 3.02% the same week one year ago, according to Freddie Mac data.
As mortgage rates rise, demand for loan applications among prospective buyers or homeowners looking to refinance has hit a 22-year low.
So far, the rising rates have yet to show a major impact on prices.
The National Association of Realtors said the median existing-home sales price was $407,600 in May, up 14.8% from one year ago. However, existing home sales declined by 3.4% for the month — a sign of abating demand.
Larry Botel, a senior real estate adviser at Solomon Partners, said a housing correction is inevitable and “has already started to happen.”
“Your average home buyer cannot afford to pay the same amount as they could so prices need to adjust,” Botel said. “The same math will also continue to benefit the rental market as it will continue to be an option for price conscious homebuyer.”
A drop in housing prices would align with the Fed’s plan to bring down prices. Shortly after the Fed hiked its benchmark interest rate by three-quarters of a percentage point for the first time since 1994, Fed Chair Jerome Powell acknowledged the rapid changes in the housing market.
“I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset,” Powell said. “We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”
While a price decline in key markets is likely, Zandi downplayed the possibility of a sweeping crash in housing on par with what transpired during the subprime mortgage crisis of 2008 — when risky lending practices led to a collapse in the market. The price drops are expected to be relatively low.
Zandi noted that available inventory is still historically tight, with housing vacancies at all-time lows this time around rather than the all-time highs posted during the last crash. Mortgage lending is also far more stable than it was a decade ago.
“I just don’t see the kind of mortgage defaults and distressed sales that would be necessary for big declines in housing values. That’s when you get crashes, when you have lots of foreclosures and a lot of distressed sales,” Zandi says. “That’s just not going to happen.”