Powell: ‘Red Hot’ Housing Market Needs Correction

Federal Reserve Chair Jerome Powell says the U.S. housing market needs to undergo a “correction” period so that purchasing a house is not an impossible prospect for potential buyers.  

“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, at a reasonable pace and that people can afford houses again,” he said Sept. 21, after the central bank raised interest rates by 75 basis points. 

Over the course of the past two years, home prices have skyrocketed alongside surging mortgage rates while inventory has remained low, with existing home sales in the U.S. dropping for seven months straight through August this year.  

Fed Hike No Surprise to Housing Sector 

However, experts in the housing sector say that the Fed’s predicted announcement was already taken into consideration and homebuyers or sellers won’t face extreme changes in rates and costs. 

“Most of the mortgage rate moves have already incorporated what the Fed would be doing and will be doing. Mortgage rates were at 3% last year, and the latest week's reading was at 6.3%,” said Lawrence Yun, chief economist at the National Association of Realtors. “Future increases should be modest from this point onwards, possibly topping at 6.5% to 7%.” 

A report published by the NAR revealed that despite low inventory and rising home prices, the number of first-time homebuyers rose 3% from 2020 to 2021. Still, research from NAR also revealed that confidence among single-family homebuilders had eroded for a ninth consecutive month leading up to September. 

But Yun believes that the “correction” period Powell is referring to is already underway. 

“There is already a sizable correction in the housing market, with marked lower home sales, mortgage lending, and single-family home construction,” Yun said. “Despite the fall in home sales activity, home prices are on firm ground. Mortgage delinquencies are at historic lows.” 

Home Prices on Uptick, Housing ETFs Still Declining 

Unlike the increase in home prices throughout the year, exchange-traded funds in the housing sector have not seen the same escalation in activity.  

Additionally, supply chain issues have affected ETFs such as the iShares U.S. Home Construction ETF (ITB) and the Hoya Capital Housing ETF (HOMZ), which have been declining due to the staggering home purchasing activity. 

ITB is concentrated on homebuilders and includes companies such as Home Depot Inc. and TopBuild Corp. in its portfolio, whereas HOMZ is a combination of real estate investment trusts, homebuilders, home improvement companies and house technology companies, and includes companies such as Zillow Group Inc. in its portfolio. 

Contact Zoya Mirza at [email protected]