“For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level and at a reasonable pace and that people can afford houses again. We probably in the housing market have to go through a correction to get back to that place,” Powell told reporters last week. “This difficult [housing] correction should put the housing market back into better balance.”
The bad news for mortgage brokers and builders? This housing correction is far from over.
Anytime the Federal Reserve flips into inflation-fighting mode, things get challenging for rate sensitive industries like real estate. Higher mortgage rates lead to some borrowers—who must meet lenders' strict debt-to-ratios—losing their mortgage eligibility. It also prices some buyers out of the market altogether. A borrower in January who took out a $500,000 mortgage at a 3.2% rate would be on the hook for a $2,162 monthly principal and interest payment over the course of the 30-year loan. At a 6.8% rate, that monthly payment would be $3,260.
But more markets could soon move into the falling home price camp. As long as mortgage rates remain near 7%, housing analysts tell Fortune we'll see downward pressure on home prices in the near term.
“The longer that [mortgage] rates stay elevated, our view is that housing is going to continue to feel it and have this reset mode. And the affordability resetting mechanism right now that has to happen is on [home] prices," Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune.
The big question: How much can "pressurized affordability"—a 3 percentage point jump in mortgage rates coupled with frothy home prices—push home prices lower? Unlike the 2008 housing crash, this time around we don't have a housing supply glut nor a subprime crisis.