The Fed’s housing market ‘reset’ won’t stop anytime soon — 5 things to know as 2023 approaches

“We have ways to go, and we have a floor to cover with interest rates before we get to this level of sufficiently restrictive interest rates… We’ll keep going until the job is done,” Powell told reporters after unveiling the Fed’s fourth report. Consecutive increase of three-quarters of a point in Federal funds rate.

That’s not exactly what builders and mortgage brokers were hoping to hear.

On the other hand, this last increase should not be sent Mortgage rates– which is the price of financial markets before expected shifts in financial conditions – a sharp rise. On the other hand, this additional rise in interest rates also means that the financial markets are not on the verge of lowering mortgage rates.

During the lobbying, Powell acknowledged that continued quantitative tightening means that more pain remains for the US housing market.

“Housing has been greatly affected by these high rates,” Powell told reporters. The housing market needs to return to a balance between supply and demand. We are well aware of what is going on there.”

Exactly what does that mean?

To get a better idea of ​​where housing market downturn May be heading in 2023, let’s take a deeper look at the Fed’s recent comments. Here are the big five points.

1. The Fed’s housing market ‘reset’ pushed us ‘difficult’ [housing] revision”

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

“We saw [home] Prices are rising sharply over the past two years. Until this changes now…I would say if you are a home buyer or someone or a young person looking to buy a home, you need a little bit of Reset. “We need to get back to a place where supply and demand come back together and where inflation is down again, and mortgage rates are down again,” Powell told reporters this summer.

At the time, Powell admitted he wasn’t sure how the “reset” would affect home prices. However, fast forward to the September meeting, Powell acknowledged that the Fed’s policy moves had pushed the US housing market into Difficult correction.

according to Moody’s Mark Zandi, chief economist at Analytics, the housing correction is a period in which the US housing market — priced to 3% of mortgage rates — is working toward equilibrium in the face of high interest rates. Unlike the stock market, housing corrections are being felt more sharply by the sharp drop in home sales. So he said, Zandi says this correction will also put downward pressure on home prices.

2. US home prices fall for the first time since 2012 – Fed says it could turn into a ‘substantial’ drop

In June, Powell said he was “not sure” about that Mortgage rates rise That would translate into lower housing prices. But Powell said on Wednesday, “You are in some parts of the country [now] Seeing home prices go down.”

The data supports it. Last reading of Case-Shiller National Home Price Index It shows that US home prices fell by 1.3% between June and August. this First nationwide decline since 2012.

“While this [housing] The market correction may be fairly mild, and I cannot rule out the possibility of a further decline in demand and home prices before the market returns to normal,” he said. Federal Reserve Governor Christopher Waller told an audience at the University of Kentucky in October.

Waller went on to say that this could turn into a “substantial” drop in home prices.

What is the size of the “physical” patch? Waller did not explain.

3. The epidemic demand boom is over

Even as policymakers sought to rescue an economy with a double-digit unemployment rate in the spring of 2020, the US housing market was already heading for a boom.

This boom was driven by the rising demand for housing. Rich urban areas wanted second homes to help them escape from closed cities. Remote workers realized they could finally move deeper into the suburbs or quit for a more affordable market. Meanwhile, investors have realized that a combination of high home prices and historically low mortgage rates means that they can make big profits in the housing market.

“We show that the COVID-19 housing boom in the United States has been driven by an increase in demand… With new construction typically accounting for about 15% of supply, we estimate that new construction would have had to increase by about 300% to absorb the increased demand of an era epidemic,” Federal Reserve researchers wrote this summer.

It’s all over now. In the face of high mortgage rates, this growing demand has diminished. Second home purchases cistern. Fins called timeout. Some potential buyers were called into the office.

This historic drop in demand may help the housing market achieve Powell’s goal of “equilibrium.” By temporarily sidelining buyers, the Fed could give stocks breathing room to adjust upwards.

4. The US Mortgage-Backed Stock Market Is Still “Broken”

At what time The Fed goes into anti-inflation modeMortgage rates are rising.

However, the scale of the mortgage rate gains — interest rates have jumped from 3.09% to 7.3% over the past year — has taken the industry by surprise. Historically, mortgage rates have been trading about 1.75 percentage points above the 10-year Treasury yield (which is currently 4%). That difference is about 3 percentage points at the moment. the reason? As the Fed also pulled back from buying mortgage-backed securities, investors –who assume that new borrowers will refinance in the future and thus reduce returns– You weren’t keen on buying MBS securities.

This difference between Treasury yields and mortgage rates has some analysts claiming “Mohammed bin Salman’s market is broken.”

While the Fed has not publicly commented on the spread, Powell said in June that he expects mortgage rates to eventually fall. What could cause that? If the Fed succeeds in taming inflation, it may roll back the increases. There is also the possibility that higher interest rates could push us into a recession, which could prompt the Fed to cut rates.

5. A “physical” decline in housing prices should not trigger a financial crisis similar to the one of 2008

Unlike the housing correction that began in 2006, Powell does not expect that Correction 2022 to cause a financial collapse.

“From a financial stability point of view, we haven’t seen in this cycle the kinds of weak underwriting credit that we saw before the Great Financial Crisis. Home credit has been more carefully managed by lenders. It’s a completely different situation. [in 2022]does not offer potential, [well] It does not appear to raise financial stability issues. But we understand that [housing] “It’s where our policies have a very big impact,” Powell said Wednesday.

Federal Reserve Governor Waller received a similar message in October.

“Despite the dangers of a physical correction In home prices, several factors help reduce my concerns that such a correction could trigger a wave of mortgage defaults and potentially destabilize the financial system.” Waller told an audience at the University of Kentucky. “One is that because of the relatively tight subprime underwriting in 2010, the credit scores of the mortgage borrower today are generally higher than they were before the recent housing correction. The experience of the last housing correction has also taught us that most borrowers default only when they experience a negative income shock in addition to Being underwater in a mortgage.”

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