What a real estate market correction could mean

The US housing market may be heading for a correction after more than two years of massive price growth, most recently offset by the Federal Reserve’s attempt to curb inflation by raising interest rates.

The central bank’s effort led to a sharp increase in mortgage rates, a decline in the number of homes under contract and a record slowdown in September’s monthly price growth of 2.6%.

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

Corrections in the national 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% decline from peak levels nationwide,” Tucker said, noting that a correction in the stock market refers to a decline of 10% or more from peak levels. .

Median home prices fell 0.4% in September to $358,283 from a June peak of $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 growth in prices over the past two years.

“Due to pandemic-related distortions, 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 seen in subways where prices have soared during the pandemic, and especially those where remote workers have flocked to reduce the cost of living.

Data released last week by the National Association of Realtors showed home prices increased in most U.S. metros last quarter. Seven of the top 10 subways that experienced the largest price gains were in Florida, where the typical price increase was more than 18 percent, and half of the nation’s most expensive markets were in California.

Nationwide, prices for an existing median-priced single-family home increased 8.6 percent from last year to $398,500, despite the current price slowdown.

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 surged above 7% again last week after declining 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 more than $600, bringing 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’re not historically high, but they’re much higher than they’ve been,” Powell said. “We understand that that’s where a very large 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 could be a silver lining for buyers even if high mortgage rates counteract 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 silver lining for buyers is the reduced competition rather than anything related to the cost of a home,” Tucker added. “Buyers who can overcome affordability 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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