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‘Coast to Coast’ Housing Correction Is Coming, Says Moody’s Chief Economist

June 23, 2022, 12:12 PM

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US home prices will likely fall in the most overvalued markets, projects Mark Zandi. But it will fall short of a crash.

A housing correction will reach from “coast to coast” in the US, but it will fall short of a crash, according to Mark Zandi, chief economist at Moody’s Analytics.

With the Federal Reserve introducing the biggest increase in interest rates in years to combat rising inflation, home prices will likely fall in the housing markets that are most “juiced,” says Zandi. Regions with signs of significant speculation, namely in the Southeast or Mountain West, can expect the pendulum to swing back. Cities and states due for a correction include Phoenix and Tucson in Arizona, the Carolinas, northeast Florida, and above all, Boise — “the most overvalued market in the country,” per Moody’s analysis.

If and when it comes, a drop in housing prices isn’t going to bring much immediate relief to renters, Zandi cautioned. With the supply of starter homes for buyers so limited, and interest rates rising, would-be buyers will have limited options to move from leases to loans. Rising permits and construction for multifamily housing will relieve pressure some, causing rent growth to increase less rapidly.

Zandi made the comments at a bipartisan housing policy summit in Washington, D.C., where speakers and participants, including members of Congress, addressed the severe stress in the housing market amid the growing specter of recession. Despite the broad reach of a looming price adjustment, a crash is unlikely, he says, for three reasons:

Housing vacancy rates are at an all-time low. Vacancy rates reached historic highs before the financial crisis more than a decade ago that led to the Great Recession.

The quality of mortgage underwriting is high. Most loans are “plain vanilla” 30-year or 15-year fixed-rate products, with no sign of the subprime or negative amortization activity that precipitated the foreclosure crisis.

While some markets are marked by speculation and flipping, nationwide the evidence for flipping is low.

“I just don’t see the the kind of mortgage defaults and distressed sales that would be necessary for big declines in housing values. That’s when you get crashes, when you have lots of foreclosures and a lot of distressed sales,” Zandi says. “That’s just not going to happen.”

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