After the Federal Reserve delivered its third consecutive 75-basis-point rate hike, Chair Jerome Powell drew additional attention with comments suggesting that the US housing market needs a “difficult correction” to return to a healthier balance and improve affordability for buyers.
Powell says slower home-price growth is positive
Speaking this week, Powell said the slowdown in housing prices should help bring valuations closer in line with rents and other market fundamentals. In his view, the long-term objective is a better alignment between housing supply and demand so that home prices rise at a reasonable pace and “people can afford houses again.”
He added that, from a business-cycle perspective, this “difficult correction” should help put the housing market back into better balance. The wording stood out because it appeared more direct than earlier references to a housing “reset,” leading some market watchers to interpret the comments as a sign that the Fed is prepared to tolerate weaker home prices if that helps reduce inflation.
Higher borrowing costs are cooling demand
Data from Bankrate dated September 24, 2022, showed the average rate on a 30-year fixed mortgage reached 6.55%, up 27 basis points over the previous seven days. As financing costs rise, housing markets in several US regions are cooling faster than others. Redfin data highlighted sharper declines in places including Seattle, Las Vegas, San Jose, San Diego, Sacramento, Phoenix, Oakland, North Port in Florida, and Tacoma in Washington.
Rick Palacios Jr., head of research at John Burns Real Estate Consulting, said the Fed’s shift in language from “reset” in June to “correction” now suggests policymakers are comfortable with falling home prices, softer sales, and a significant pullback in construction if that is what it takes to meet their inflation-fighting objective.
Economists warn the adjustment may last years
Several experts cited in follow-up coverage argued that the US is already in a housing correction with no quick end in sight. Moody’s Analytics chief economist Mark Zandi said more than half of the top 400 US housing markets are “significantly overvalued” by more than 25%. He expects the process to unfold over the next couple of years, with the market potentially not bottoming until mid-decade.
With the Fed still committed to a long-run inflation target of 2%, housing is becoming one of the clearest channels through which tighter monetary policy is affecting the broader economy. Mortgage costs, slowing transactions, and price declines are now central indicators for investors watching the next phase of the US economic slowdown.