Jerome Powell just warned that the US housing market needs a “difficult correction” so people can afford homes again ⁠— but here’s why it won’t look like 2008

Jerome Powell just warned that the US housing market needs one

Jerome Powell just warned that the US housing market needs a “difficult correction” so people can afford homes again ⁠— but here’s why it won’t look like 2008

Property investors have generally done well in recent years. But with higher interest rates, things may be about to change.

The US central bank raised its benchmark interest rates by 0.75 basis points on Wednesday, marking the third such increase in a row.

Higher interest rates translate into larger mortgage payments – not good news for the housing market. But cooling house prices is part of what needs to be done to get inflation under control.

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“Longer term, we need supply and demand to be better aligned, so that home prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again,” Fed Chair Jerome Powell said on Wednesday. “We in the housing market will probably have to go through a correction to get back to that place.”

“From a sort of cyclical standpoint, this difficult correction should put the housing market back into better balance.”

These words may sound frightening, especially to those who lived through the last financial crisis – where the housing market went through a very, very difficult correction.

But experts say there are good reasons to believe that no matter how things play out, there won’t be a return to 2008.

Higher lending standards

Questionable lending practices within the financial industry were an important factor that led to the housing crisis in 2008. Financial deregulation made it easier and more profitable to issue risky loans – even to those who could not afford them.

So when a growing number of borrowers couldn’t repay their loans, the housing market floundered.

That’s why the Dodd-Frank Act was passed in 2010. The law placed restrictions on the financial industry, including creating programs to stop credit unions and lenders from issuing bad loans.

Recent data suggests that lenders are actually stricter in their lending practices.

According to the Federal Reserve Bank of New York, the median credit score for newly originated mortgages was 773 for the second quarter of 2022. Meanwhile, 65% of newly originated mortgage debt was to borrowers with credit scores above 760.

In its quarterly report on household debt and credit, the New York Fed stated that “credit scores on new mortgages remain fairly high and reflect continued strict lending criteria.”

Homeowners in good shape

As house prices rose, homeowners built more equity.

According to mortgage technology and data provider Black Knight, mortgage holders now have access to an additional $2.8 trillion in equity in their homes compared to a year ago. That represents a 34% increase and over $207,000 in additional equity available to each borrower.

Also, most homeowners did not default on their loans even at the height of the COVID-19 pandemic, when foreclosures sent shock waves throughout the economy.

Of course, it was these mortgage forbearance programs that saved the struggling borrowers: they were able to stop their payments until they regained financial stability.

The result looks good: The New York Fed said the share of mortgage balances 90 days plus past due held at 0.5% at the end of Q2, close to a historic how.

Supply and demand

On a recent episode of The Ramsey Show, host Dave Ramsey pointed out that the big problem in 2008 was a “huge oversupply because foreclosures were going everywhere and the market just froze.”

And the crash was not caused by interest rates or the health of the economy, but rather “a real estate panic.”

Right now, the demand for housing is still strong, while the supply is still in short supply. This dynamic may begin to change as the Fed tries to dampen demand by raising interest rates.

Ramsey acknowledges the slowing growth in home prices right now, but doesn’t expect a 2008-like crisis.

“It’s not always as simple as supply and demand – but it almost always is,” he says.

This article provides information only and should not be construed as advice. It is supplied without warranty of any kind.

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