
Speaking at a recent Brookings Institute event, Fed Chair Jerome Powell told the audience that the run-up in home prices during the pandemic housing boom qualifies a “housing bubble.”
“Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing,” said Powell, in a recent Fortune article by Lance Lambert. “So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand.”
The U.S. housing market got objectively bubbly during the pandemic. In fact, data produced by the Dallas Fed finds that home prices in 2022 are actually more detached from underlying fundamentals than they were 2005 and 2008.
Over the coming year, those detached fundamentals should begin to heal a bit. That's a view held by firms like Morgan Stanley, Zonda, KPMG, John Burns Real Estate Consulting, Moody's Analytics, Goldman Sachs, Wells Fargo, Fannie Mae, and Zelman & Associates. Those firms believe that "pressurized" affordability (i.e. mortgage rates spiking 3 percentage points just after U.S. home prices soared 40%) will see home prices fall further in 2023. If U.S. home prices—which are already down 2.2% from their June 2022 peak—continue to fall and incomes continue to rise, fundamentals would indeed begin to come back down to earth.
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