The Fed says the housing market needs a “hard correction” to balance. In Utah, this is already happening

After announcing another 0.75% increase in the benchmark interest rate on Wednesday amid the Fed’s battle with inflation, Federal Reserve Chairman Jerome Powell said the US housing market is likely to go through a “hard correction” before achieving a “better balance”.

what does that mean?

Well, we’ve already seen that. Home price increases – in some areas more than others – stabilize if they do not start to fall.

“The slowdown in home prices we’re seeing should help bring prices more in line with rents and other housing market fundamentals,” Powell told reporters on Wednesday. “That’s a good thing.”

But that doesn’t mean it won’t be painful.

“In the long run, what we need is for supply and demand to align better so that home prices rise at a reasonable level and at a reasonable pace and people can buy homes again,” Powell said. “So it’s likely, in the housing market, that we’re going to go through a correction process until we get back to that place.”

“From a business cycle point of view, this difficult correction should return the housing market to a better equilibrium,” Powell added.

What does housing “correction” mean for the West?

Powell’s language on Wednesday gave more insight into what Powell meant in June when he said the housing market needed to “reset”.

There has been speculation about whether this means the Fed’s goal is to soften buyer demand to give a boost to stocks or whether the Fed really wants home prices to fall, but in the minds of some housing analysts, Powell’s language is strengthening this week, Fortune reported Thursday. . The explanation that the Fed’s intention is to lower home prices.

what are they saying: “The Fed’s shift in word choice from ‘housing needs to reset’ in June to ‘housing reset today actually means a correction’ indicates that they are just fine with falling home prices, declining home sales, and declining construction.” Largely in order to achieve Fortune, Rick Palacios Jr., head of research at John Burns Real Estate Consulting, told Fortune.

The Big Picture: The COVID-19 pandemic sent the nation into a housing frenzy, with home prices jumping to unprecedented levels as mortgage rates at times remained below 3%, driving up demand not just for sales, but for refinancing.

Now, with mortgage rates soaring to 6%, the party is over. Low mortgage rates no longer mask the effects on affordability of these record high home prices.

Now, the United States is addressing the unavoidable affordability crisis. Enough potential homebuyers have reached their limits and backtracked rapidly over the past several months as this has had a significant impact on demand.

Home prices in Utah, Idaho: The effect was rapid and dramatic, especially in the West. Local housing markets, including Boise, Idaho and, yes, Salt Lake City, which were among the cities that have seen home prices skyrocket amid the frenzy of the pandemic, are now also among the first to see prices plummet as the frenzy fades.

From May through August, home values ​​in the metro Boise area fell 5.26%, and home prices in Salt Lake City fell more than 7%, according to a Fortune analysis of Zillow’s Home Value Index.

The ‘Frightening Effect’ in Utah

On Thursday, the Salt Lake Council of Realtors took a closer look at how rising mortgage rates are affecting home sales and home prices in Salt Lake County.

Home prices in Salt Lake County: The median price for a single-family home in August was $601,000. Now, that’s still up 10% year over year, from $545,000 in August last year. But that’s also down 7.5% from when it peaked at $650,000 in May, according to the Salt Lake Council of Realtors.

Let’s put that in another perspective. Prices for single-family homes in Salt Lake County have increased by a staggering 63% since the start of the pandemic, from March 2020 to May 2022.

This is an increase of $250,000 in two years — up from $400,000 in March 2020.

Now, those days of rapid acceleration in prices are gone.

Relaxation results: “Severe interest rate hikes by the Federal Reserve appear to have little effect on inflation, but they do have a chilling effect on the housing market,” Steve Perry, president of the Salt Lake Board of Realtors, said in a prepared statement. of homes per month on average for 10 years.”

Home inventory on topped 10,000 homes — a 150% increase from the 4,000 active listings this time last year, when competition among buyers was high and inventory was low. Now, the stock has reached a more balanced level, according to the board.

“The bidding wars are over,” Berry said. “Offers in excess of the asking price and forfeiting valuations are over. Home buyers have more choices and choices when buying a home.”

It also takes much longer to sell homes now. In August, the average number of days a home was on the market in Salt Lake County was 22, according to the council. That’s three times longer than it was a year ago, when the average market days were just over seven.

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