At a Federal Open Market Committee press conference in September, Federal Reserve chair Jerome Powell was asked to clarify what he meant when he said the U.S. housing market would “reset.” He answered: “We’ve entered into a ‘difficult correction’ that will see the U.S. housing market transition to a more “balanced” market for buyers and sellers alike.”
With that said, he still hasn’t addressed if home prices will fall. However at the University of Kentucky this week, Fed Governor Christopher Waller told the audience it’s possible we could see a drop in prices.
“While this [housing] market correction could be fairly mild, I cannot dismiss the possibility of a much larger drop in demand and house prices before the market normalizes,” Waller said.
This was the first time a Federal Reserve official has acknowledged that the housing correction could see housing prices fall at the national level. Waller also said the home price correction might end up being more of a small trickle down.
“Despite the risk of a material correction in house prices, several factors help reduce my concern that such a correction would trigger a wave of mortgage defaults and potentially destabilize the financial system,” Waller said. “One is that because of relatively tight mortgage underwriting in the 2010s, the credit scores of mortgage borrowers today are generally higher than they were prior to that last housing correction. Also, the experience of the last correction taught us that most borrowers only default when they experience a negative shock to their incomes in addition to being underwater on their mortgage.”
The Fed acknowledging that home prices could fall comes after many markets are already starting to see the home prices fall. Among the 148 major regional housing markets tracked by the Burns Home Value Index, 98 of those markets have seen home values fall from their peaks this year. In 11 markets, they have dropped by more than 5%
“Prices have even fallen in some areas of the country, especially those that saw the largest increases over the previous two years. And many builders are reportedly cutting their list prices and offering larger incentives,” Waller told the audience.
Two markets are getting hit the hardest by the housing correction. High-cost tech hubs like the San Francisco market is down 7.8% from its 2022 peak while San Jose is down 9% and Seattle is down 6.2%. The other market group are bubbly markets where home prices have reached levels well beyond what local incomes can support historically like Austin which is down 6.2% along with Boise (down 5.3%) and Phoenix (down 4.4%). According to Moody’s Analytics, The Austin and Phoenix market are overvalued by 61% and 57% respectively. Typically markets that are significantly overvalued are the most vulnerable to home price cuts during a housing correction.