Existing home sales showed a 5.4% drop in June compared to May, but prices remained high, according to the National Association of Realtors. The median sale price of existing homes in the United States hit a new record high of $416,000 in June, marking a 13.4% increase from a year ago.
However, for those who continue to monitor rising home prices, Moody’s Analytics chief economist Mark Zandi warns that the correction could be “dead ahead.”
But, as many fear, it is not a collapse, as he says in an interview with CNBC’s “Fast Money”.
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Mortgage rates rise
Mortgage rates continue to rise as interest rates rise further, with some forecasting a rise of 3.25% in the short term. On a 30-year fixed rate loan, mortgage rates are now around 6%.
With these rates rising, Zandi says, mortgage payments could be several thousand dollars higher than they were a year ago. And this loss of affordability is exactly why he sees a correction in the near future.
“If we stay around six, I think the market will adjust and we will eventually get that correction. If it goes up much higher than that, we will have a bigger pullback in the housing market.”
First time home buyers are banned
Federal Reserve Chairman Jerome Powell on June 14 told millennials and other first-time home buyers that now is not the time to invest in housing. Speaking in his speech, he said that prices may continue to rise for some time, as it continues to be a “tight market”.
“If you’re buying a home, or a guy who’s looking to buy a home, you need a little bit of a reset,” Powell said. “We need to get back to a place where supply and demand are back together and where inflation is down again, and mortgage rates are down again.”
However, even as the Federal Reserve continues to work “really hard” to slow the economy’s growth in inflation and mortgage rates, home prices continue to rise. Zandi says housing is the most rate-sensitive sector of the economy and therefore likely to be the first to feel the effects of inflation.
This includes slowing home prices as mortgage rates continue to rise.
“This is the scenario, so far, is exactly what the Fed wants to see.”
Institutional investment in housing is here to stay
Meanwhile, institutional fund giants like Blackstone and Brookfield are buying homes to rent at high rates — something Zandi believes is likely to continue, even as mortgage rates rise. That is because these institutions have raised a large amount of capital in recent years and need ways to use it wisely. A long-term investment in real estate is the best option.
Zandi suggests that these long-term investments are the reason why we are unlikely to see a collapse in the housing sector. These are long-term investments that will not be sold overnight, creating stability in the market.
“I think this is a successful business model. I don’t think they will sell. They may not buy in this environment, and they may wait and see how things turn out.”
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