The U.S. is seeing itâ€s second biggest home price correction of the post-WWII era with 55% of Americans saying they cannot afford to buy their home in todayâ€s market, according to the CATO Institute 2022 Housing Affordability National Survey.

Mitch Roschelle, Macro Trends Advisors founding partner, told Fox News he attributes the huge correction to Americanâ€s uneasiness regarding the markets and the economy. He said that the “shoe to drop” would be seeing a rise in unemployment that may cause a “leg down” in the real estate market.

“A couple of things are going to cause it to turn in the opposite direction, meaning home prices are going up. One is certainty. And when you don’t know if interest rates are going to go up or not. I think that is what is driving a lot of people away from buying because they just don’t know if rates are going to be cheaper in two months, and they’re just going to wait,” said Roschelle.

He went on to say, “And the other thing is uneasiness regarding the economy. And I think the shoe to drop there would be if we start seeing layoffs, and we start seeing unemployment starting to rise, I think that could be something that causes a leg down in the housing market in a big way.”

Roschelleâ€s comments follow a power shift currently happening in the U.S. housing market away from sellers. 

“Right now, I would say it’s a buyer’s market. I think the power has completely shifted from seller to buyer. Doesn’t mean you don’t see some bidding wars because again, I think statistically across the country, we’re at 3.3 months supply. So that’s still relatively low. So, if there’s a house that hits the market that’s perfect, and it ticks all the boxes for buyers and there are buyers out in the market, I think you could see sporadically bidding wars, but mostly, you know, it’s one or two people chasing that house. And we’re not seeing that. We’re not,” Roschelle said.

The average home price is expected to plummet from its peak at the height of the pandemic. According to Fortune.com the price of homes in the country in October 2022 were 38.1% above March 2020 levels. Roschelle believes that the average price will drop by at least 10% from its peak in 2022.

“My 10% to 15% [prediction] is from the peak in 2022, that is where we land in terms of average home prices being down 10 to 15%. Which if we’re talking about the stock market, it would certainly be seen as a correction, but not a bear market. The thing to remember is that from February 2020, home prices went up as much as 40% to where we are today,” Roschelle explained.

You can view the CATO Institute 2022 Housing Affordability National Survey here.

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A new report released this month by UNC Charlotteâ€s Childress Klein Center for Real Estate (CKCRE), the Charlotte housing market is showing signs of softening but itâ€s becoming difficult to find homes that are priced affordably. 

The “2022 State of Housing in Charlotte” report, says home buyers and renters in the eight-county region are entering a second year of high prices and a lack of affordable housing. According to the report, only 25% of the houses are sold for under $300,000 while 3.8% of the houses sold for half that price. 

“In particular, the prices at the lower end of the distribution have increased much faster than at the higher end, causing significant concerns for housing affordability in the region,” said Yongqiang Chu, CKCRE director and the primary author of the housing report.

The dramatic rise in interest rates in recent months has made housing affordability much worse. The 30-year fixed mortgage interest rates rose from 2.96% in January 2021 to almost 7% in September 2022.

Middle-income housing affordability is becoming a challenge for the region. For a median-priced home, the required income has increased from $89,816 in 2020 to $136,750 in 2022. This is an increase of 73%. The median home price in Charlotte increased from $237,500 in January 2020 to $420,000 in September 2022. That is a 54% increase in 32 months.

The combination of rising interest rates and house prices have made housing unaffordable in the Charlotte region.

“At some point this will become a serious concern for people who want to do business here,” Chu said. He went on to say that there needs to be an increase in supply and offered two solutions to the problem. First, make development easier by regulations and restrictions and then build on green space.

“We should be willing to make those compromises, before Charlotte becomes really unaffordable and people donâ€t want to live here anymore,” Chu said. 

While the market does continue to be tight, there are some signs of softening since this past summer. The median number of days a house is on the market has increased from three days to nine days in the months of May 2022 to September 2022. Prior to the pandemic, the median days on the market was about 20 days. 

The report also found that over the last few years, the average rent has increased by 27% per unit or $320, a swift acceleration in rental prices.

You can click here to see the full report from CKCRE.

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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: “Weâ€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 hasnâ€t addressed if home prices will fall. However at the University of Kentucky this week, Fed Governor Christopher Waller told the audience itâ€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 Moodyâ€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. 

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Since the start of 2022, mortgage rates have more than doubled as the Federal Reserve continues its unprecedented hiking of interest rates to try and tame the rise of inflation. However, the uncertainty of a possible recession and the impact of the rate hikes on the economy has made mortgage rates more volatile. 

“Mortgage rates decreased slightly this week due to ongoing economic uncertainty,” said Sam Khater, Freddie Macâ€s chief economist. “However, rates remain quite high compared to just one year ago, meaning housing continues to be more expensive for potential homebuyers.”

According to Freddie Mac, the average mortgage rate is based on a survey of conventional home purchase loans for borrowers who put down the 20% down payment and have excellent credit. There are many buyers though who put down less money upfront or have a credit score that isnâ€t too great who will pay more. 

Each piece of economic data has been scrutinized by investors and analysts alike. They are searching for clues about the Federal Reserves next steps along with the future of the U.S. and global economies. 

The interest rates borrowers pay on mortgages may not be directly set by the Fed but its actions influence them. As investors anticipate rate hikes, they often sell government bonds, which sends yields higher and mortgage rates rise. The mortgage rates tend to track the yield on 10-year Treasury bonds. For the past month, yields on 10-year Treasuries have risen from 3.25% to almost 4% then fell back to nearly 3.75 this week. 

Danielle Hale, Realtor.comâ€s chief economist compares investors†actions to a driver during a dense fog, prone to over-correcting on each turn. 

“Signs that we are closer to the end of the tightening cycle – such as a surprisingly steep decline in job openings – tend to cause rates to slip, while rates bounce higher on signals like robust activity in the services sector,” said Hale.

Rates may have lowered slightly this first week of October but the average interest rate for a 30-year fixed-rate loan is still more than double what it was at this time in 2021.

Last year, a home buyer who put down 20% on a $390,000 home with the rest financed through a 30-year fixed-rate mortgage at an average interest rate of 3% had a monthly mortgage payment of a little less than $1,500.

Today, that homeowner buying the same house with an average rate of 6.66% would pay a little over $2,000 each month in principal and interest. Thatâ€s around $500 more each month. 

“While rate increases are needed to tame inflation and alleviate the burden it places on household budgets, higher borrowing costs have caused consumers to think twice about major purchases like homes and cars,” said Hale.

Those still looking to buy may have a little more breathing room.

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For the first time in nearly three years, home prices declined 0.77% from June to July according to Black Knightâ€s Home Price Index. Black Knight is a mortgage software, data and analytics firm. While the drop may be small at less than 1%, it is the largest single-month decline in prices since the beginning of 2011. This is also the second-worst July performance dating back over 30 years, behind the 0.9% decline in July 2010, during the Great Recession.

The sudden rise in mortgage rates this year aided an already expensive housing market in becoming even less affordable. The price of homes rose abruptly during the first year of the pandemic because demand was strong while supply was historically weak with record low mortgage rates.

Currently, housing affordability is at its lowest level in 30 years. According to Black Knight, buying a house requires 32.7% of the median household income to purchase the average home using a 20% down payment with a 30-year mortgage. This is about 13% more than the median income required entering the pandemic in 2020 and much more than both of the years before and after the Great Recession. 23.5% is the 25-year average. 

“Weâ€ve been advising for quite some time that the dynamic between interest rates, housing inventory and home prices was untenable from an affordability perspective, and at some point, something would have to give,” said Andy Walden, vice president of enterprise research and strategy at Black Knight.

He went on to say: “Weâ€re now seeing exactly that, with Julyâ€s data providing clear evidence of a significant inflection point in the market. Further price corrections are likely on the horizon as we move into what are typically more neutral seasonal months for the housing market.”

Historically, prices rise on average 0.4% between June and July due to the market being heavily weighted by families buying larger homes. Most families prefer moving during the summer when the kids are on summer break.

Home prices were still 14.3% higher in July than they were a year prior. This is more than three times the historical annual price growth. However majority of that growth took place in the beginning of 2022 before interest rates increased. The average rate on a 30-year fixed mortgage began this year around 3%. Each month it slowly climbed before sharply rising to over 6% in June. Right now interest rates are around 5.75%

More than 85% of major markets have seen prices come off their peaks through July. The top 5 cities seeing the steep decline in pricing over the last few months were San Jose, CA at 10%. Seattle, WA was down by 7.7%. San Francisco, San Diego, and Los Angeles saw price drops by 7.4%, 5.6% and 4.3% respectively. 

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Some homebuyers are backing out of deals as the housing market slows, allowing them more room to negotiate while others are being forced to back out of contracts due to higher mortgage rates that are making the homes no longer affordable. 

“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” said Redfin Deputy Chief Economist Taylor Marr. “Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the homebuying process.”

Marr went on to say: “Rising mortgage rates are also forcing some buyers to cancel home purchases. If rates were at 5% when you made an offer, but reached 5.8% by the time the deal was set to close, you may no longer be able to afford that home or you may no longer qualify for a loan.”

The housing market has cooled recently as the Federal Reserve boosted interest rates in an effort to thwart inflation. This has allowed potential homebuyers more freedom to seek concessions from sellers. At the same time, the higher rates also make the home less affordable. Buyers did catch a small break last month when the average 30-year fixed mortgage rate fell to 5.3%. It was the largest one-week drop since 2008.

“When mortgage rates shot up to almost 6% in June, we saw a number of buyers back out of deals,” said Lindsay Garcia, a Redfin agent in Miami. “Some had to bow out because they could no longer get a loan due to the jump in rates. Buyers are also more skittish than usual due to economic uncertainty.”

The metro area with the most pending sales to fall out of contract was Las Vegas, NV at 27.2%. Newark, NJ saw the lowest pending sales to fall out of contract– 2.6%.. In order to be included, the metro area must have had at least 1,000 pending home sales in June 2022. 102 metro areas made the list. Charlotte came in at number 76 on the list with 11.6% of pending sales falling through.

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In hot markets like San Jose, Chicago and Phoenix, “for sale” signs are more prevalent. The volume of U.S. monthly home sales have hit double-digit declines recently. This is according to estimates from the National Association of Realtors. The number of homes sold was down 19% in May compared to May of 2021 according to Zillow. And according to some preliminary data, it looks like the decline continued in June.

“This yearâ€s buyers are just much more savvy, and they deserve to be because theyâ€re going to be paying more to purchase the home,” said Daniel Valdez, an agent with eXp Realty in Sacramento.

Even with this slight slowdown, itâ€s given little relief to buyers. The combination of high interest rates and inflation, many would-be buyers are forced to walk away.

Some sellers are mindful of the huge gains of the 2020 and 2021 housing market, which brought the average listing price up more than 40%, and are reluctant to lower their prices or expectations. 

“The marketâ€s cooling off, but that cooling has happened on the backs of buyers getting discouraged, on buyers being forced out of the market,” said Jeff Tucker, a senior economist at Zillow. “People who thought they would join the party are being greeted by absolute carnage as far as affordability right now.”

Record low interest rates helped fuel the surge in housing prices in 2020 and 2021 but the Federal Reserve reversed course earlier this year after inflation spiked. Higher rates means higher borrowing costs. The 30-year fixed-rate mortgage is up 2.9% from a year ago. That coupled with a battered stock market and higher costs for food and fuel, makes it even harder for buyers to save up for a down payment. The result is would-be buyers are out which leads to fewer deals. 

Rachel Payne, a public school teacher in northern Virginia, told The Washington Post that she gave up on her search recently after her dream home fell through. She and her fiancé, a professional poker player, put in an offer of $1.05 million on a four-bedroom house in the Belle Haven neighborhood of Alexandria, but the seller wanted to waive an inspection. A move Payne thought to be too risky. A week later, she says it sold for the same price.

“What we are seeing today is that buyers do, in fact, have a limit,” Wolf said. “Prospective home buyers have gotten to the place that they are either intentionally stepping out of the housing market as they wait and see what happens next, or are forced out of the housing market given the higher costs of homeownership.”

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While some buyers have had to handle much larger mortgage payments, some sellers began to notice offers of $100,000 over asking price may now be a thing of the past. 

“Right now, weâ€re in this cauldron of uncertainty,” said Jonathan J. Miller, the president of Miller Samuel Real Estate Appraisers & Consultants. “Housing hates uncertainty. The biggest enemy of the housing market is uncertainty, and we have buckets full of uncertainty.”

What is causing such a shift in the real estate market? High interest rates for one. Unless youâ€re able to pay in cash, buying a house got even more expensive.

Since December of last year, mortgage rates have nearly doubled. Right now they are around 6% which is the highest they have been since 2008. All in a response by the Federal Reserve to try to control inflation. At the beginning of the year, a buyer would have paid about $2,100 a month in principal and interest for a $500,000 home loan. If a buyer purchases that home today, their loan would cost nearly $1,000 more. 

Combined with the current home prices, which rose more than 20% between May 2021 to May 2022, most buyers arenâ€t able to make adjustments for that kind of increase in interest rates. 

“Thatâ€s a one-two punch that a lot of buyers canâ€t overcome,” said Rick Sharga, an executive vice president of market intelligence at ATTOM, a real estate data company.

In 1981, interest rates peaked at 18.4%. Experts arenâ€t thinking rates will return to those levels however until inflation is under control, rates will continue rising.

“When inflation peaks, mortgage rates will have peaked, and thatâ€s really the key ingredient,” said Greg McBride, the chief financial analyst at Bankrate.com. “If we get more inflation numbers like we did a couple of weeks ago, there is no telling how high mortgage rates could go.”

Itâ€s unlikely that prices will drop dramatically but there are some signs of slowing. According to a recent Refin report, 6.5% of listings dropped their prices each week.

Prices are slightly down but demand is down too. The Redfin report also found that fewer people were searching for homes and touring properties. Pending sales fell 13% and mortgage applications were down 24%. According to Redfin, this is the largest drop since May 2020.

The market could return to levels resembling the pre-pandemic era. Homes could take a few months to sell. Buyers may be able to make a few demands again– request sellers pay closing costs, asking for appraisals and inspections– rather than having to buy site unseen or pay well over asking price. However, it is still a sellerâ€s market. According to the National Association of REaltors, the median price of a home in the U.S. rose above $400,000 for the first time.

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For the week ending July 7, the 30-year fixed-rate mortgage averaged 5.3% according to data released by Freddie Mac. That is down from 5.7% the week before. Even with the 40 basis points drop, itâ€s still significantly higher than the 2.9% rate from this time last year.

At the start of the new year, rates rose sharply. They hit a high of 5.81% in mid-June but since then economic concerts have pushed them lower. 

“Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise,” said Sam Khater, Freddie Mac’s chief economist. He went on to say “While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown.”

 The drop in rates, along with a 5.4% drop in applications for mortgages for the week ending July 1, reveals a somewhat cooling in the U.S. housing market.

“Mortgage rates decreased for the second week in a row, as growing concerns over an economic slowdown and increased recessionary risks kept Treasury yields lower,” said Joel Kan, Associate Vice President of Economic and Industry Forecasting for the Mortgage Bankers Association. 

As inflation takes a large chunk of an Americanâ€s income, buyers are finding it harder to buy a home. The cost of a loan has reduced their purchasing power. 

In 2021, a buyer who put a 20% down payment on a $390,000 home and financed the rest with a 30-year fixed-rate mortgage had a monthly payment of around $1,200 with an average rate of 2.9%. Today, that same home buyer would pay a little over $1,700 in principal and interest. That is about $500 more every month. 

The decline in mortgage rates last week follows recent volatility in the 10-year Treasury yield. In the first week of July, it dropped 2.8% after spending much of June over 3%.

The Federal Reserve does not set the interest rates that borrowers pay on mortgages directly. However, its actions do influence the rates. Mortgage rates typically track 10-year U.S. Treasury bonds. When investors anticipate rate hikes, they will often sell their government bonds. This behavior sends yields higher along with mortgage rates.

“This inversion might sound ominous, especially in the midst of sustained inflation that both markets and the Fed agree will likely require more fed funds rate hikes to tame, but it remains to be seen whether these market conditions will lead to increases in the unemployment rate or decreases in production that characterize a recession,” said Realtor.comâ€s senior economic research analyst. 

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Even with a monthly drop in sales four months in a row and declining affordability, the National Association of Realtors reports that the housing market remains fairly hot. Properties are typically staying on the market for a record low of 16 days. While supply is still low, prices could remain elevated and in some areas where bidding wars were prevalent, sellers are reducing the listing price.

“Existing home sales should continue to slow over the course of the year as mortgage rates move higher,” said David Berson, chief economist at Nationwide in Columbus, Ohio. “But in the absence of a deep and sustained economic downturn, home sales should not drop as they did in the housing bust – allowing prices to continue to move higher on average.”

Last month, existing home sales fell 3.4% to a seasonally adjusted annual rate of 5.41 million units. This is the lowest level since June 2020. Sales then were starting to rebound from the covid-19 lockdown slump. In the Northeast, sales rose but in the South, West and Midwest sales declined. 

In a recent poll conducted by Reuters, economists forecasted sales would decrease to a rate of 5.40 million units. It was estimated that in order to see a housing market downturn, sales would need to drop to between a rate of 4 million to 4.5 million.

The median existing house price rose 14.8% from a year ago to an all-time high of $407,600 in May. This is the first time prices have crossed the $400,000 mark. 

42% of houses sold in May were in the $250,000 to $500,000 price range. 19.3% of houses sold in the $500,000 to $750,000 bracket while 19.5% of homes sold were priced at $100,000 to $250,000. 

The double-digit price growth came from the South and West but the migration to areas in the South due to a pandemic-driven migration, are slowing. This could help control price appreciation.

“The affordability migration will lose some steam now that interest rates have risen, which will make it a bit tougher to sell homes in those higher-price markets,” said Mark Vitner, a senior economist at Wells Fargo in Charlotte.

80% of homes that sold in May were on the market for less than a month. 27% of sales were from first-time buyers. It would take 2.6 months to drain the current inventory of existing homes at Mayâ€s sales pace. This is up from 2.5 months a year ago. A healthy supply is seen as a six-to-seven month supply. 

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