What a correction in the housing market could mean

The US housing market could be heading towards a correction after more than two years of massive price growth that was more recently offset by the Federal Reserve’s attempt to curb inflation by raising interest rates. The central bank’s effort led to a sharp rise in mortgage lending rates, a drop in the number of homes under contract and a record slowdown in monthly price growth in September of 2.6 percent.

A correction would allow buyers to spend more time on the market and possibly have less competition for homes, but experts say recent price falls may not be enough to offset high mortgage rates combined with historical price increases during the pandemic.

Corrections in the domestic housing market are rare, economists told The Hill. While there is no fixed definition, experts said the market is in a correction when changing conditions cause house prices to drop.

“We are seeing that home values ​​nationwide are now slightly down from their June peak, part of a rebalancing of the housing market as potential buyers are retreating due to rising costs and sellers are reacting by lowering the price of property. listing or accepting a lower offer on their home, “Zillow senior economist Jeff Tucker told The Hill in an email.

“But domestic values ​​are nowhere near a 10% drop from peak levels nationwide,” said Tucker, noting that a correction in the stock market refers to a 10% or more drop from peak levels. .

Median home prices fell 0.4% in September to $ 358,283 from a June peak at $ 359,719, according to data from Zillow.

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 the distortions linked to the pandemic, house prices have grown at a historically fast pace in recent years. This has led to many markets across the country being considered overvalued, “Maleyev said.

According to Moody’s research, more than half of the country’s real estate markets are overvalued in the middle of this year. That leaves a lot of room for those markets in particular to see their home prices return to Earth, “he added.

Some of these price drops have been observed in subways where prices have soared during the pandemic, and particularly in those where remote workers have flocked to reduce the cost of living.

Data released last week by the National Association of Realtors showed that home prices rose in most US subways last quarter. Seven of the top 10 subways that recorded the highest price gains were in Florida, where the typical price hike was more than 18 percent and half of the nation’s most expensive markets were in California.

Nationwide, prices for an existing mid-priced single-family home rose 8.6% from last year to $ 398,500, despite the current slowdown in prices.

Although buyers are seeing some relief from the slight drop in prices, rising mortgage rates continue to push home ownership out of reach for many Americans.

Since the Federal Reserve began its series of aggressive interest rate hikes, mortgage rates have more than doubled. The rate for a 30-year fixed-rate mortgage jumped back above 7% last week after dropping slightly a week earlier.

These rates are driving up payments, and recent data shows average monthly mortgage payments have risen nearly 50% from pre-pandemic levels.

Average monthly payments increased by over $ 600, taking the monthly payment on a typical single-family home to $ 1,840 after a 20% down payment.

Federal Reserve Chairman Jerome Powell told reporters following the central bank’s latest interest rate hike earlier this month that the agency is aware of the negative impact the Fed activity is having on the market. real estate.

“Housing is significantly impacted by these higher rates, which are really back to where they were before the global financial crisis. They are not historically tall, but they are much taller than they have been, ”Powell said. “We understand that this is where a very big effect of our policies lies.”

High rates also mean a price correction may not be a big boon to buyers for two main reasons, Taylor Marr, deputy chief economist at real estate firm Redfin, told The Hill.

“The first is that any drop in house prices so far has not yet fully offset the rise in mortgage rates, leaving homebuyers’ monthly mortgage payments still much higher than when rates were lower in the beginning. of the year, ”Marr said in an email.

“If home values ​​start to drop enough to offset the rise in rates, buyers will also be dissuaded from buying a home that is losing value: no one wants to take a falling knife and risk being the biggest fool,” he added.

However, there may be a bright spot for buyers even as high mortgage rates counter some of the positive effects of falling prices.

“This small price drop isn’t helping buyers break through. The impact of higher mortgage rates far outweighs the impact of slightly lower prices, ”Tucker said.

“The bright side for buyers is that there is little competition rather than anything related to the cost of a home,” added Tucker. “Buyers who can overcome accessibility barriers and stay in the market will have less competition and more time to consider their options, which is a marked change from last year when bidding wars were the norm.”

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