Home price correction deepens what to expect from the

Home price correction deepens – what to expect from the US housing market in 2023

Any time the Federal Reserve goes into anti-inflation mode, the US housing market will be vulnerable. But if those rate hikes come after U.S. home prices have risen 43% in just over two years, the fallout will be even more pronounced.

Of course we see that now. Despite favorable demographics and tight inventories, squeezed affordability – high mortgage rates coupled with inflated home prices – is beginning to push home prices lower. In fact, this week we learned that US home prices, as measured by the Case-Shiller US National Home Price Index, posted their first monthly decline since 2012.

Across the country, the US housing market – which was priced in at 3% mortgage rates during the pandemic housing boom – is working towards equilibrium in the face of 6% mortgage rates. But we’re still in the early innings. And the ongoing home price correction still hasn’t hit all markets: Between May and August, San Jose home prices fell 10.6%, while Orlando home prices rose 2%.

To better understand where the U.S. housing downturn is headed next — and whether the home price correction will soon hit more markets — Fortune turned to Zonda chief economist Ali Wolf. When she’s not traveling around the country speaking to home builders, she’s advising the White House on housing issues.

Below is Fortune’s Q&A with Ali Wolf.

Fortune: As the data rolls in, it’s pretty clear that home prices are falling in many markets across the country. It’s pretty sharp in some places. Do you expect house price declines to continue into 2023?

Wolf: We haven’t seen a drop in house prices nationwide, but there are some markets where house prices have started to fall, and we expect to see that in more major cities across the country over the next few months. Corrections in home prices are expected in 2023 as long as interest rates remain high and consumer demand remains weak.

What types of markets are most vulnerable?

The most vulnerable markets include: 1) Those where home prices have risen sharply due to hybrid work, such as Boise, Las Vegas and Denver. 2) Markets that do not have a local employment base to support higher home prices (in other words, markets where home prices and incomes are out of whack), such as Nashville and parts of Florida. 3) Markets where housing stock has grown rapidly, such as Phoenix and Austin.

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Why are markets like Austin, Boise and Phoenix changing so quickly?

The real estate booms in markets like Austin, Boise and Phoenix were among the earliest in the nation and among the strongest. Record-low mortgage rates combined with lifestyle changes brought about by the pandemic, including working from home and increased relocations, have resulted in a dramatic increase in housing demand and supply has not been able to keep up.

Those moving from places like California and Washington were able to tap home equity from a sale in the higher-priced market and use those funds to buy a new home in these relatively cheaper markets. Relocation shoppers found these markets very affordable compared to those they moved from, to the detriment of local shoppers.

There was a belief in these markets that the imbalance between supply and demand would exist so severely and so long that the markets could never overheat. Buyers, desperate to secure a home, were willing to pay almost any price to secure a home. Investors and pinball saw these markets as ripe for opportunity. This mentality contributed to the massive increase in home prices.

However, as interest rates rose in early 2022, reality set in. The rise in home prices has slowed and not every home listed has sold for above list price within a day of going online. Demand for housing slowed as some of the new homes under construction came online and the inventory of existing homes quickly increased as sellers tried to time what they believed to be the top of the market.

What impact do you expect on the housing market from mortgage rates close to 7%? We already corrected with 5% mortgage rates. Should we expect things to tighten at rates of 6.5% to 7%?

Many factors determine housing affordability, but the two most important factors are house prices and mortgage rates. We have just lived through a unique period in American history when rising home prices were offset by record low interest rates. The cheap financing helped keep the monthly mortgage payment in check.

Since the beginning of the year, however, interest rates have risen dramatically, which is weighing on the affordability of housing. Buyers have already been squeezed out of the market as interest rates rose from 3% to 4% and every 100 basis point hike has continued to push millions of Americans out of their homes.

If mortgage rates remain elevated for an extended period of time, we expect housing demand to remain weak, housing construction to be restricted and home prices across the country to adjust downwards.

Home price correction deepens what to expect from the

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This story was originally published on Fortune.com