US Home Prices to Undergo Correction as Rising Rates Set to Kill Affordability

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Moody's has warned that a correction in US home prices is round the corner despite a steady increase in prices of late. Analyst Mark Zandi of Moody's Analytics says home price correction in the US is "dead ahead." But the analyst says a home price crash is ruled out.

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Row Houses in US Wikimedia Commons

Rising Prices

US home prices have been inching up ever since the Federal Reserve started tightening monetary policy. Between April and May this year prices increased more than 1 percent across the country, according to the National Association of Realtors. A Yahoo Finance report says that the increase has been higher in some parts of the country, such as the Northeast, where prices spiked more than 15 percent.

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Rates and Affordability

However, analysts expect that the level of the rise in mortgage rates following the Fed rate hikes holds the key to the medium-term future of the housing market.

According to the report, mortgage rates are now about 6 percent, on a 30-year fixed-rate. If the rates go beyond this, mortgage payments will rise substantially and home affordability will come into question.

"If we stay around six I think that the market will adjust and we'll eventually get that correction. If it goes much higher than that we'll get a more significant pullback in the housing market," Mark Zandi says.

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Even the Fed chief, Jerome Powell, had warned would-be home buyers that they might want to wait before taking a plunge into the market.

"If you are a homebuyer, or a young person looking to buy a home, you need a bit of a reset ... We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again," Powell had said.

Meanwhile, CFO Survey conducted jointly by Duke University's Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta shows that optimism about the US economy is declining. The survey was conducted among as many as 300 US financial executives. '

US housing market
US housing market Wikimedia Commons

"Price pressures have increased, real revenue growth has stalled and optimism about the overall economy has fallen sharply .. Monetary tightening [by the Federal Reserve] is one of several factors dampening the economic outlook," John Graham, the survey's academic director, said, according to Housing Wire.

Moody's analyst Mark Zandi concludes that the US is entering a period in which home sales will fall and housing inventory will rise. This will lead to home price growth falling to 0 percent by this time next year.

"The monthly costs of new mortgages on existing homes sold at median transaction prices [are] more than 60% higher than a year ago," the Moody's report states. "Although higher mortgage rates do not always drive home prices lower, they typically affect sales activity and drive down the rate of price appreciation," Moody's says.

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This article was first published on July 4, 2022