Housing Market Correction Probable According to Jerome Powell
On 9/21/22 the Federal Reserve voted to raise interest rates another 75 basis points in an attempt to bring down inflation. In his press briefing, Jerome Powell also made comments about the housing market. He said we need supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace, so that people can afford houses again. In order to do this, we will probably need to go through a housing market correction. This indicates to me that the Federal Reserve is not concerned about falling home prices, and actually see it as a positive for the long term.
To analyze his comments, we take a look at housing affordability in the US and in California. In California, housing affordability is getting close to the lows we saw in 2006-2007. This was when home prices reach a peak before crashing during the Great Recession. Many counties are also seeing housing affordability near or at all time lows since their tracking began.
3 things can happen to improve affordability.
1. Home prices can decline
2. Interest rates can drop
3. Household incomes can increase
Since the Federal Reserve is indicating they will continue to raise interest rates, and household incomes are typically relatively stable, there is really only one option for housing affordability to increase.
Below are a few interesting charts related to housing market values:
Stocks vs. Home Values: https://www.longtermtrends.net/stocks-to-real-estate-ratio/
Home Values vs. Median Income: https://www.longtermtrends.net/home-price-median-annual-income-ratio/
Home Values vs. Inflation https://www.longtermtrends.net/home-price-vs-inflation/
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By: Tim Hamilton
Broker Associate
Lic# 01959966
(714) 486-4086
timsellsca@gmail.com