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Fed housing market ‘reset’ won’t recover anytime soon — 5 things to know as we head into 2023


“We have a lot of ways to go, we have the facility to cover interest before we get to a sufficiently limited interest rate… we’ll keep going until the job is done,” Powell said. to reporters after the disclosure of the Fed’s fourth provision. up three quarters in a row in Federal interest rate.

That’s not exactly what builders and mortgage brokers had hoped to hear.

On the other hand, this latest increase should not mortgage interest rate—Which financial markets price in the face of expected changes in financial conditions — spike. On the other hand, this additional rate hike also means that financial markets won’t cause mortgage rates to drop.

In the interview, Powell acknowledged that continued quantitative tightening means the US housing market will be in even more pain.

“Housing is significantly impacted by these higher rates,” Powell told reporters. “The housing market needs to return to a balance between supply and demand. We know well what’s going on there.”

What does it mean exactly?

To better understand the place housing market downturn possibly starting in 2023, let’s dive deeper into the recent Fed commentary. Here are five great lessons learned.

1. The Fed’s housing market “reset” pushed us into a “tough” [housing] adjust”

In June, Powell told reporters that the US housing market needs to be “reset”.

“We have seen [home] Prices have been increasing dramatically over the past few years. So that changes now… I’d say if you’re a homebuyer, someone or a young person looking to buy a home, you need a little bit. reinstall. We need to go back to where supply and demand come together and there inflation is low again, and mortgage rates are low again,” Powell told reporters this summer.

At the time, Powell admitted that he wasn’t sure how the “reset” would affect home prices. Fast forward to the September meeting, however, and Powell acknowledged that the Fed’s policy moves have pushed the US housing market into a tailspin. “Hard to fix.”

Based on Moody’s Analytics chief economist Mark Zandi says housing adjustment is the period during which the US housing market – already valued at 3% of mortgage rates – operates in equilibrium in the face of high rates. spike. Unlike the stock market, the housing correction is felt most acutely through a sharp drop in home sales. Which says, Zandi says this adjustment will also put downward pressure on house prices.

2. US home prices fall for first time since 2012 – Fed says it could turn into a “raw” drop

In June, Powell said he was “not sure” if Mortgage interest rates spike translates into lower house prices. But on Wednesday, Powell said “in some parts of the country, you [now] see house prices fall. “

The data backs him up. .’s latest reading Case-Shiller National House Price Index shows that home prices in the US fell 1.3% between June and August. That is the first nationwide drop since 2012.

“While this [housing] The market correction could be quite mild, I can’t rule out the possibility of more demand and home prices falling before the market normalizes.” Fed Governor Christopher Waller addresses an audience at the University of Kentucky in October.

Waller went on to say that this could turn into a “physical” home sale.

How big is “matter” editing? Waller did not elaborate.

3. The demand boom of the pandemic is over

Even as policymakers managed to save an economy with double-digit unemployment in the spring of 2020, the US housing market went into boom mode.

That boom was preceded by a spike in housing demand. The rich cities want second homes to help them escape from the locked cities. Distant workers realize they can eventually move deeper into markets or take off for a more affordable marketplace. Meanwhile, investors are realizing that the combination of rising home prices and historically low mortgage rates means they could kill the housing market.

“We show that the COVID-19 housing boom in the US is driven by an increase in demand… Since new construction typically accounts for about 15% of supply, our estimates imply that construction will have to increase by about 300% to absorb the increased demand during the pandemic, ” Fed researchers wrote this summer.

Now it’s all over. With mortgage rates skyrocketing, the boom in demand waned. Second home purchases have increased. Flippers are called timeouts. And some buyers will be called back to the office.

This historic drop in demand could help the housing market achieve Powell’s goal of “balanced.” By temporarily setting aside buyers, the Fed can make room for inventories to adjust upwards.

4. The US mortgage-backed stock market is still “broken”

Anytime Fed moves into anti-inflation modemortgage rates increased.

That said, the magnitude of the rise in mortgage rates – rates that rose from 3.09% to 7.3% in the past year – caught the industry off guard. Historically, mortgage rates have traded around 1.75 percentage points above 10-year Treasury yields (currently 4%). That difference is currently around 3 percentage points. Reason? When the Fed supports buying mortgage-backed securities, investors—who assume that new borrowers will refinance in the future and thus reduce profits—Not eager to buy MBS securities.

This divergence between Treasury yields and mortgage rates has some analysts asserting “The MBS market is broken.”

While the Fed does not publicly comment on the spread, Powell said in June that he expects mortgage rates to eventually fall. What could be causing that? If the Fed successfully controls inflation, it could pull back the momentum. There is also the possibility that higher interest rates could push us into a recession, which would then prompt the Fed to lower rates.

5. The “physical” fall in house prices shouldn’t cause a financial crisis like 2008

Unlike home repairs that began in 2006, Powell doesn’t expect the adjustment in 2022 to trigger a financial collapse.

“From a financial stability point of view, we don’t see in this cycle the kinds of poor credit guarantees we saw before the Great Depression. Housing credit is carefully managed by lenders. It’s a very different situation [in 2022]it has no potential, [well] it does not appear to exhibit financial stability problems. But we understand that [housing] Powell said Wednesday.

Fed Governor Waller had a similar message in October.

“Despite the risk of a material editing In terms of home prices, a number of factors help ease my concerns that such an adjustment would trigger a wave of mortgage defaults and potentially destabilize the financial system.” Waller to an audience at the University of Kentucky. “One is because mortgage underwriting was relatively tight in the 2010s, the credit scores of mortgage borrowers today are generally higher than they were before that last housing revision. In addition, the experience of the most recent adjustment has taught us that most borrowers default only when they experience a negative income shock in addition to their mortgage debt. “

Want to stay up-to-date on home repairs? Follow me on Twitter in @NewsLambert.

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