Home prices may not just be falling, they could plummet amid a housing correction

Higher interest rates have particularly cooled the housing market in recent months, as many buyers have been cashed out of the market due to the combination of these higher interest rates and higher home prices. As a result, many properties are staying longer and seeing price cuts in an effort to sell – but bigger cuts may be coming soon.

Speaking to a panel at the University of Kentucky, Fed Governor Christopher Waller said that while the Federal Reserve still sees interest rate hikes making the correction mild, the possibility of a bigger drop is still in the picture.

“While this [housing] The market correction could be quite mild, I cannot rule out the possibility of a much larger drop in demand and house prices before the market normalizes,” he said.

But while prices could fall, he assured it would not lead to a similar collapse that led to the 2008 recession and housing crisis.

“Despite the risk of a substantial 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,” he 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 before the last housing correction. Also, the experience of the last correction taught us that the more borrowers default only when they experience a negative income shock in addition to being underwater on their mortgage.”

This is the first time anyone from the Fed has admitted that prices could fall more substantially, as several markets have already seen their home values ​​begin to fall from their 2022 highs.

Previous home sales data showed hot pandemic markets like Phoenix, Tampa and Boise, Idaho have cooled significantly, with data compiled by Redfin showing a 31.9% year-over-year decline in sales in Phoenix in a year, 29.1% in Boise and 18.3% in Tampa.

Sales actually fell in every market Redfin analyzed, with similarly steep declines in places like Anaheim, Calif. (30.1 percent), Las Vegas (37.2 percent), San Jose, Calif. (33.8 percent ), Seattle (30.8%) and San Francisco ( 29.6%).

However, prices were still up in almost all markets even at that time, with the exception of San Francisco, where prices fell 7.3% year-over-year. The higher prices, combined with interest rates rising to 6.97% on Friday, could prompt even more buyers to short the market, making the drop in prices necessary as the Fed is unlikely to cut rates again anytime soon .

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