Rising mortgage rates have quelled home buyer demand, cutting into both sales and prices. That’s for the better, according to Federal Reserve Chairman Jerome Powell.
Mortgage rates have risen substantially this year as the Federal Reserve has moved to combat inflation. Weekly 30-year fixed mortgage rates published by
have doubled since last year, adding about $600 to the monthly cost of a home compared with the final week in 2021. This week’s average rate was 6.29%, the highest such measurement since 2008.
A pullback is necessary to restore balance to the housing market, Powell said Wednesday during a press conference after the Federal Open Market Committee meeting. “What we need is supply and demand to get better aligned, so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again.”
He added that the housing market will likely have to “go through a correction to get back to that place.“
Higher financing costs have caused some buyers to pull back. Existing-home sales fell for the seventh straight month in August. Home purchase loan applications, a leading indicator of future sales, increased last week, but were still 30% lower than the same week in 2021, according to the Mortgage Bankers Association.
“The housing market continues to face headwinds as mortgage rates increase again this week, following the 10-year Treasury yield’s jump to its highest level since 2011,” Sam Khater, Freddie Mac’s chief economist, said in a statement on Thursday. “Impacted by higher rates, house prices are softening, and home sales have decreased.”
The adjustment has been swift: as recently as earlier this year, heightened competition over a relatively low supply of homes was contributing to significant home price increases. “Famously, houses were selling to the first buyer at 10% above the ask, before even seeing the house—that kind of thing,” Powell said. “Housing prices were going up at an unsustainably fast level.”
As demand has dropped, year-over-year price appreciation has cooled from its once-rapid double-digit pace. The median existing home in August sold for $389,500, an increase of 7.7% year-over-year—the lowest year-over-year rate of price appreciation since June 2020 and well below the pandemic peak of about 25% in May 2021.
“The deceleration in housing prices that we’re seeing should help bring prices more closely in line with rents and other housing market fundamentals,” Powell said. “And that’s a good thing.”
The Fed chairman also addressed housing’s contribution to inflation. The cost of shelter continued to gain in August, according to Consumer Price Index data. “Shelter inflation is going to remain high for some time,” Powell said. “We’re looking for it to come down, but it’s not exactly clear when that will happen.”
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