Comments from Fed Chairman Powell in June 2022 on housing
The fate of the housing boom is on the minds of homeowners and buyers these days. Will record home values lead to a crash reminiscent of the one that made the Great Recession so painful? Or will prices just take a break from their frantic pace of appreciation?
I would say if you are a home buyer or a young person looking to buy a home, you need a bit of a reset.
— Jerome PowellChairman of the Federal Reserve
No one knows, not even the most powerful central banker in the world. At the press conference following last week’s meeting of the Federal Reserve’s Open Markets Committee, Fed Chairman Jerome Powell acknowledged a sharp rise in mortgage rates. They have fallen from 3% in August 2021 to 6% now, according to Bankrate’s national survey of lenders.
“We are well aware that mortgage rates have risen a lot and you are seeing an evolution in the housing market,” Powell said in response to a question from Mark Hamrick, senior economics analyst at Bankrate. “We are watching him to see what will happen. How much will this really affect residential investment? Not really sure. How will this affect housing prices? Not really sure. We are monitoring this very carefully.
What this means for house prices
Housing economists do not expect steep price declines, at least not nationally. After all, the supply of homes for sale remains near its lowest level. And while a rise in mortgage rates has dampened demand somewhat, demand still outstrips supply, thanks to a combination of little new construction and strong household formation by large numbers of millennials.
The National Association of Realtors said on Tuesday that rising mortgage rates have slowed home sales. Even so, the median price of homes sold nationally hit a record high of $407,600 in May, up 14.8% from May 2021, and the inventory of homes for sale remains below trend levels. ‘one year ago.
“It’s still a very tight market,” Powell said during last week’s remarks to reporters. “Prices can continue to rise for a while, even in a world where rates are rising. It’s a complicated situation.”
Powell: buyers need to be ‘reset’
The sharp rise in house prices over the past two years has made affordability a major challenge, especially for first-time buyers. Unlike regular buyers, first-time buyers haven’t built up an equity cushion as prices have skyrocketed since 2020.
“I would say if you’re a homebuyer or a young person looking to buy a home, you need a bit of a reset,” Powell said.
Although the Fed does not directly control mortgage rates, it does set the federal funds rate, a figure that both reflects economic reality and attempts to steer economic activity toward sustainable levels of growth. The Fed cut rates to zero at the start of the coronavirus pandemic.
“Rates were very, very low for quite a while because of the pandemic and the need to do everything we could to support the economy when unemployment was at 14% and the true unemployment rate was far superior to that,” Powell said.
But as inflation accelerated to 40-year highs, the Fed responded by raising rates three times in 2022, including a 0.75 percentage point hike last week.
what you can do
How homebuyers can weather the still tough market:
- Shop around for a mortgage. Rates and fees vary widely from lender to lender. Comparing at least three offers from competing lenders can save you thousands of dollars over the term of the mortgage.
- Look for a low down payment loan. For borrowers struggling to afford a home, the monthly payment is just one hurdle. Another comes with a down payment. With a typical American home selling for around $400,000, a 10% down payment means writing a check for $40,000. There is, however, a potential workaround in the form of mortgages backed by the Federal Housing Administration and the US Department of Veterans Affairs. FHA loans and VA loans have less onerous restrictions than conventional loans. While the standard down payment is 20%, VA loans require no down payment and FHA loans have a minimum 3.5% down payment.
- Consider a repairman. For buyers frustrated by the lack of inventory and skyrocketing prices, older homes can be a good compromise. In Bankrate’s survey earlier this year, 21% of respondents said they would try this tactic. Of course, buying a repairer means you are undertaking a project, which brings uncertainty. No matter how careful you are in estimating your renovation budget, you can count on surprises, especially in a time when material costs are volatile and construction labor is scarce. Renovation experts say you should plan for cost overruns in the range of 15-20% of your construction budget.
- Move to a more affordable neighborhood. Many buyers are faced with the harsh reality that they cannot afford to buy in the neighborhood they really want. In some cases, buyers decide to leave the most difficult markets. Home prices have skyrocketed everywhere, but prices are particularly breathtaking in California. The median price of an existing home sold in Silicon Valley during the first quarter of 2022 was $1.88 million, according to the National Association of Realtors. In San Francisco, the typical price was $1.38 million and in Orange County, $1.26 million. However, a number of major metropolitan areas are still showing affordable real estate prices. They include Buffalo ($202,300 median Q1 selling price), Philadelphia ($297,900), Louisville ($235,400), St. Louis ($216,700), Kansas City ($287,400) and Milwaukee ( $298,800).