“We’ve got a long way to go, we’ve got a long way to go with interest rates before we get to that sufficiently restrictive level of interest rates…we’ll stay the course until the job is done,” he said. Powell told reporters after unveiling the Fed’s fourth report. consecutive increase of three quarters of a point Federal funds rate.

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

For one thing, this last hike shouldn’t send mortgage rates– that financial markets are pricing before anticipated changes in financial conditions – up. On the other hand, this further rate hike also means that the financial markets are not about to drive mortgage rates down.

During the press conference, Powell acknowledged that continued quantitative tightening means more pain still awaits the US housing market.

“Housing is significantly affected by these higher rates,” Powell told reporters. “The housing market must regain a balance between supply and demand. We are well aware of what is happening there.

What does this mean exactly?

To get a better idea of ​​the place the slowdown in the housing market could be heading into 2023, let’s dive deeper into the Fed’s recent comments. Here are the five big takeaways.

1. The Fed’s housing market “reset” has thrown us into a “ [housing] correction”

In June, Powell told reporters that the U.S. housing market needed to be “reset.”

“We saw [home] prices have risen very, very sharply over the past two years. So that’s changing now…I would say if you’re a homebuyer or someone or a young person looking to buy a house, you need a little reset. We need to get back to a place where supply and demand are together again and inflation is low again and mortgage rates are low again,” Powell told reporters this summer.

At the time, Powell admitted he was unsure of the impact of the “reset” on house prices. However, fast-forwarding to the September meeting, Powell acknowledged that the Fed’s policy actions had pushed the U.S. housing market into a “difficult to correct”.

According Moody’s Chief Analytical Economist Mark Zandi, a housing correction is a period in which the US housing market – which has been priced at 3% mortgage rates – works towards equilibrium in the face of rising rates. sharply. Unlike the stock market, real estate corrections are felt the hardest by a sharp decline in home sales. That said, Zandi says this correction will also put downward pressure on house prices.

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

In June, Powell said he was “not sure” if skyrocketing mortgage rates result in lower house prices. But on Wednesday, Powell said “in some parts of the country you’re [now] see real estate prices fall.”

The data backs it up. The last reading of the Case-Shiller National Home Price Index shows that US home prices fell 1.3% between June and August. This is the first nationwide decline since 2012.

“While this [housing] the market correction could be quite mild, I cannot rule out the possibility of a much larger decline in demand and house prices before the market normalizes,” Fed Governor Christopher Waller told an audience at the University of Kentucky in October.

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

What is the magnitude of a “material” correction? Waller did not elaborate.

3. The demand boom due to the pandemic is over

Even as policymakers raced to save an economy with double-digit unemployment in the spring of 2020, the U.S. housing market was already shifting into boom mode.

This boom was triggered by a spike in housing demand. Wealthy city dwellers wanted second homes to help them escape the locked cities. Remote workers realized they could finally move deeper into the suburbs or take off for a more affordable market. Meanwhile, investors realized that a combination of appreciating home prices and historically low mortgage rates meant they could pick up a bargain in the housing market.

“We show that the COVID-19 housing boom in the United States has been driven by an increase in demand…Given that new construction typically accounts for around 15% of supply, our estimates imply that new construction should have increased by around 300% to absorb the increase in demand in the era of the pandemic”, wrote Fed researchers this summer.

It’s over now. Faced with soaring mortgage rates, this boom in demand has deflated. Purchases of second homes have plummeted. Flippers called timeout. And some potential buyers have been called back to the office.

This historic decline in demand could help the housing market achieve Powell’s “equilibrium” objective. By temporarily excluding buyers, the Fed can give stocks some breathing room to adjust higher.

4. US mortgage-backed securities market remains ‘broken’

Whenever the Fed goes into inflation-fighting modemortgage rates are rising.

That said, the magnitude of the rise in mortgage rates – rates have risen from 3.09% to 7.3% over the past year – caught the industry off guard. Historically, mortgage rates have traded around 1.75 percentage points above the 10-year Treasury yield (which is currently 4%). This gap is around 3 percentage points right now. The reason? As the Fed backed away from buying mortgage-backed securities, investors…which assume that new borrowers will refinance in the future and thus reduce returns— were not eager to acquire the MBS securities.

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

Although the Fed has not publicly commented on the discrepancy, Powell said in June that he expects mortgage rates to eventually come down. What could be causing this? If the Fed manages to tame inflation, it could undo its hikes. It is also possible that higher rates will push us into a recession, which would then prompt the Fed to lower rates.

5. A “material” drop in house prices should not trigger a financial crisis similar to that of 2008

Unlike the real estate correction that began in 2006, Powell does not expect the fix of 2022 trigger a financial collapse.

“From a financial stability perspective, we haven’t seen in this cycle the kinds of poor underwriting credit that we saw before the Great Financial Crisis. Real estate credit was much more carefully managed by lenders. is a very different situation [in 2022]it has no potential, [well] it does not appear to have financial stability problems. But we understand that [housing] This is where a very important effect of our policies lies,” Powell said on Wednesday.

Fed Governor Waller had a similar message in October.

“Despite the risk of a hardware fix house prices, several factors help reduce my concern 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. “The first is that due to relatively tight mortgage underwriting in the 2010s, mortgage borrower credit ratings are now generally higher than they were before this latest housing correction. Moreover, the experience of the last correction has taught us that most borrowers only default when they experience a negative income shock in addition to being underwater on their mortgage.

Want to stay up to date on housing correction? follow me on Twitter at @NewsLambert.

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