Just how will the Federal Reserve’s .75 percentage-point increase in interest rates affect the price of homes? Well, according to chairman Jerome Powell, who spoke about the situation on Wednesday, homebuyers “need a bit of a reset” until supply can catch up to demand.
In an analysis of how the new, higher rates could influence the bottom line of home sales, Fortune’s Lance Lambert suggests the move could result in less expensive housing — and more houses to choose from — as rates above six percent scare off potential buyers. With fewer people available to bid on homes, fewer bidding wars will occur, ultimately bringing down prices. And with fewer people looking to buy, inventory will inevitably inch up.
That will create a better position for buyers, according to Powell, who thinks the market they eventually enter will be a friendlier one.
While Powell stopped short of predicting housing prices will fall, he didn’t rule it out.
And lower housing prices could mean we would be entering a rare market where year-over-year home prices actually go down — something that historically has only happened during events like the Great Depression and the housing crash of the 2000s.
Lambert also suggests other indicators are showing a price drop is on the way, as in the last few years the rise in housing prices hasn’t jibed with how the rest of the economy is doing. Home prices are historically connected to the income workers bring home, and both can’t outrun the other for too long. Presently, home prices are reaching the limits of what incomes can afford. And the last time that happened, prices tumbled.
Still, the analysis suggests home prices won’t come down until the supply of homes on the market — which is still very low — catches up to demand.
As to the fate of mortgage rates, the Lambert suggests they could eventually come back down, but not until the Fed’s moves get inflation back under control — meaning getting the Consumer Price Index that is now sitting at 8.6 percent down to 2 percent.
[Fortune] — Vince DiMiceli