Comments from Fed Chairman Powell in September 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 breakneck pace of appreciation?

The deceleration in house prices we are seeing should help bring prices closer to rents and other housing market fundamentals – and that’s a good thing.

— Jerome PowellChairman of the Federal Reserve

No one knows, not even the most powerful central banker in the world. During the press conference after the September 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 had a period of a hot housing market, nationwide, where famous homes were selling to the first buyer at 10% above asking, before you even saw the house,” Powell said during the interview. press conference. “There was a huge imbalance between supply and demand, and housing prices were rising to an unsustainable level. So the deceleration in house prices we’re seeing should help bring prices closer to rents and other housing market fundamentals – and that’s a good thing.

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 Sept. 21 that rising mortgage rates had slowed home sales and prices. The median price of homes sold nationwide fell to $389,500 in August, up nearly 8% from August 2021, but below the all-time high of $413,800 set in June.

“The sectors of the economy that are most interest rate sensitive are certainly showing the effects of our tightening, and of course the obvious example is housing, where you’re seeing a drop in activity of all kinds and house price increases falling,” Powell said. journalists at the press conference.

Powell: Buyers need a ‘correction’

The sharp rise in home prices over the past two years has made affordability a major challenge, especially for first-time homebuyers. Unlike regular buyers, first-time buyers haven’t built up an equity cushion as prices have skyrocketed since 2020.

“Longer term, what we need is for supply and demand to be better aligned so that house prices rise at a reasonable level, at a reasonable pace, and people can once again ‘buy houses,’ Powell said. “We in the housing market probably have to go through a correction to get back to this place.”

While the Fed does not directly control mortgage rates or house prices, it does set the fed 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.

But as inflation accelerated to 40-year highs, the Fed responded by raising rates three times in 2022, including a 0.75 percentage point increase in three consecutive meetings.

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).

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