Powell warns of a correction in the once red-hot housing market

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“Hope for the best, plan for the worst.”

Home sales have declined as high borrowing costs and elevated prices exacerbate affordability issues and weigh on demand. The Associated Press

(Bloomberg) – Federal Reserve Chair Jerome Powell warned that the US housing market is likely to experience a turnaround as policymakers hike rates.

“We’ve had a period of red-hot housing markets across the country,” Powell said in a news conference following Wednesday’s Fed policy decision, in which the central bank hiked interest rates another 75 basis points.

“The slowdown in home prices we are seeing should help prices align better with rents and other housing market fundamentals. And that’s a good thing,” Powell said.

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US mortgage rates have climbed to their highest levels since 2008 in response to the Fed’s monetary tightening, with the average 30-year fixed-rate home loan hitting 6.25% last week. While year-over-year house price gains remain strong, they have slowed.

Home sales have declined as high borrowing costs and elevated prices exacerbate affordability issues and weigh on demand. A report earlier Wednesday showed that US home sales fell for the seventh straight month in August, the longest streak since 2007, and homebuilder sentiment has fallen in a record slide every month this year.

A report on Tuesday showed that home construction rose unexpectedly in August. However, a drop in building permits underscored how housing construction is coming under pressure.

“We probably need to go through a correction in the housing market to get back to a place where supply and demand are better matched, price gains are ‘reasonable’ and people can afford housing,” Powell said. Home prices “rose to an unsustainably rapid level.”

However, it will be a while before house prices and rents cool down more significantly, Powell said.

“Shelter inflation will remain high for some time,” Powell said. “Hope for the best, plan for the worst.”

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