Is The Market Correcting?

According to Moody's Analytics chief economist Mark Zandi, we have officially shifted from a housing boom to a correction. In April and May of 2022, home sales dropped 19 percent, hitting their lowest level since the same time last year. Meanwhile, Redfin reports that 19 percent of home-sellers dropped the asking price for their home over the previous month. Fueling this projected turning of the tide is, in part, the combination of fast-rising inventory and fast-dropping mortgage applications and sales of existing homes–in other words increasing supply and decreasing demand, or the recipe for a correction.

Zandi has called a peak in the housing market and forecasts it will roll over shortly. When that occurs, the growth in home prices will fall flat, with Zandi predicting year-over-year home price growth over the next 12 months will be zero percent. In some regional markets, home prices will start to drop. If this occurs, it would constitute the worst year-long stretch since 2012.

The Federal Reserve is largely to blame. Congress has given it a dual mandate to keep both inflation and unemployment low, which can sometimes be difficult to manifest at the same time. Lately, with the unemployment rate at 3.6 percent and the latest Computer Price Index (CPI) number at 8.3 percent, the Fed has appeared to shift focus more to the problem of inflation.

The Fed believes it can slow overall price growth by bringing the housing boom to an end. As such, it raised mortgage rates even higher, though that only had the effect of producing an economic shock in the markets.

Further threatening low mortgage rates is the status of new home construction and sales. To support its dual mandate, the Fed won't be satisfied simply slowing the rate of home sales; it will want to slow the pace of new home construction as well. Elevated home construction recently hit its highest level since 2006. This has put upward pressure on a whole host of building supplies, materials, and products, like lumber, steel, and home furnishings. If the housing market picks back up before inflation has been reined in, the Fed may just push mortgage rates higher still. Already, the average rate for a 30-year fixed mortgage has jumped to 5.1% from 3.11%.

There doesn’t appear to be any foreclosure crisis or housing bust looming, claims Zandi, because credit issues that caused those to happen in the past, such as the proliferation of subprime mortgages, are not present in today’s market environment. And, if home prices do start dropping, the Fed could simply start lowering rates again.

Despite this broad analysis, certain markets do seem overvalued historically speaking. In fact, in 96 percent of the country’s 392 biggest housing markets, some home prices have become overvalued relative to local incomes. Of these, 149 are 25 percent or more overvalued.

These particular markets could see drops in home prices over the next year in the 5-percent to 10-percent range. If a recession occurs, those drops could increase to 10-20 percent.

In this new market environment, inflation and income growth alike should outpace the growth in prices of homes for sale in Long Beach.