Powell: The housing market must correct itself

While during the pandemic the housing market had declined, once it ended it also exploded due to inflation; related to this, the Fed Chairman believes the market needs to change so that it will be easy for people to buy property again.

Jerome Powell analyzes the housing market

Since the pandemic, the US housing market has exploded to new levels and soared due to rising inflation. Meanwhile, Chairman of the US Federal Reserve Jerome Powell hinted this week that the US housing market needs a correction and believes it can be adjusted so that “people can afford homes again.”

The US Central Bank aims to achieve maximum employment and an inflation rate of 2% once the Federal Reserve’s ironclad approach of high rate hikes ceases.

In this regard, analysts at Goldman Sachs, the world’s largest investment bank, have released a report on how the US housing market has come to a standstill after a tentative boom in the pandemic period, the research takes the title “The housing crisis: further fall” and has been reported by all the industry newspapers.

Goldman Sachs reports how the drop in new home sales in 2022 will be 22%, the drop in existing homes will be 17%, and housing GDP will register -8.9%.

As for 2023, it predicts that the downturn in the housing market will have no rest and the sale of new homes will decline by another 8% from this year, existing homes will drop by another 14%, and the housing GDP will drop another 9.2%:

“Some of the recent weaknesses seem to reflect the reversal of the pandemic-related preference changes that are turning out to be more fleeting than we expected. We have previously noticed that the shock from the virus has accelerated family formation and increased demand for second homes … those favorable winds have already largely faded, as regions that have experienced huge increases in home sales and permits construction in 2020 and 2021 are now experiencing a disproportionate decline this year. Past housing downturns have typically been accompanied by economic downturns, which have led to an influx of housing supply as unemployment has risen and individuals have been forced to sell their homes (this was especially the case in the crisis. financial). However, an influx of supply from this channel seems unlikely in this cycle: the labor market remains robust (and likely will be, even in a mild recession) and, as we wrote last week, household balance sheets are extremely strong and Loan default rates are expected to remain historically low. Thereafter, we expect house prices to remain stable in 2023.”

Scott Anderson, Chief Economist at Bank of the West, said:

“The appreciation of house prices is destined to stop abruptly under the weight of the poor accessibility of housing and the deterioration of the economic and financial environment. This correction could happen all at once during a recession or gradually over time. Regardless of how you measure it today, house prices are extremely expensive.”

According to Crystal Sunbury, senior real estate analyst at RSM, US homes are highly overvalued:

“House prices have outpaced inflation by a significant margin. Prices are unlikely to drop into ‘fair valuation’ territory in the near future.”

Fed sets another rate hike of 75 basis points

Last week there was the third consecutive rate hike of 75 basis points, although there was some doubt as to whether the increase would be 100 or 75 points. The stock markets, cryptocurrencies and precious metals had priced in this rate hike by the Fed.

Powell intervened with a statement in which he hinted that a correction in the housing market and a freeze in home prices would be needed to bring inflation back to the much hoped-for 2%.

On Wednesday, Powell stated the following on the subject:

“The deceleration in house prices we’re seeing should help bring some sort of prices more in line with rents and other real estate market fundamentals and that’s a good thing. 

In the long run, what we need is for supply and demand to align better, so that house prices rise at a reasonable level, at a reasonable pace, and that people can afford houses again. 

From a sort of business cycle point of view, this difficult correction should bring the real estate market back into a better balance.”

Bankrate.com conducted research published on 24 September 2022 from which it shows that the current average for a 30-year fixed loan is 6.55%.

The 30-year fixed mortgage rate has risen 27 basis points in the past seven days, and ten regions in the United States are plummeting in comparison to other areas in the United States of America, according to findings by real estate company Redfin.

The housing market is undergoing a tough slump in the United States

Among the US cities most affected by this trend are Seattle, Las Vegas, San Jose, San Diego, Sacramento, Phoenix, Oakland, North Port, Florida, and Tacoma and Washington, which as we can tell from a quick glance at the map are scattered throughout the country, proving that the trend is national. 

Rick Palacios Jr, head of research at John Burns Real Estate Consulting, told the following in an interview Thursday in Fortune:

“Clearly the change in the Fed’s choice of words from ‘housing needs a reset’ in June to ‘housing repair today actually means a correction’ indicates that they are doing quite well with falling home prices, sales. of cooling houses and construction shrinking significantly to achieve their mission.”

Mark Zandi, Chief Economist at Google Analytics, interviewed by USA Today hinted that the US housing market is actually already experiencing a major contraction.

“More than half of the top 400 real estate markets in the US are” significantly overvalued “by over 25%. I think this will take place over the next two years, and it will pass through the middle of the decade until things hit rock bottom.”

John Burns Real Estate Consulting, Capital Economics, Zelman & Associates, and Zonda concur with Google Analytics’ thinking. 

90% of the industry’s sales are for existing homes, and in the coming year they will suffer a $4.73 million decline after having already hit their worst figure since 2020 this year.

Matthew Gardner, Chief Economist at Windermere Real Estate, explained in an interview that:

“Buyers are frightened by the rapid increase in financing costs they have seen so far this year. The cautious attitude will continue until the spring of 2023, when sales will resume, albeit modestly.”

The trend for housing prices to be balanced to the population’s purchasing power so that houses will be bought again will help the US economy in the long run.