Moody’s: Housing Correction Coming – but No Crash

The Fed’s interest rate hikes will cause the “pendulum to swing back down” some places, but no crash if vacancies stay low and underwriting standards remain high.

NEW YORK – Moody’s Analytics Chief Economist Mark Zandi predicts that the latest Federal Reserve interest rate hike will cause a housing correction across the United States – but there won’t be a housing crash.

He suggests that the Southeast and Mountain West are the most overvalued housing markets, and the pendulum will swing back down. 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,” according to Moody’s analysis.

While a reduction in housing prices is likely, however, renters won’t see any immediate relief because homebuyers have few options even if values fall.

Zandi says the market likely won’t crash but the fundamentals remain strong: Vacancy rates are at an all-time low, mortgage underwriting quality is high, and most loans are “plain vanilla” 30-year or 15-year fixed-rate products. There’s no sign of subprime or negative amortization activity that precipitated the foreclosure crisis during the Great Recession.

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

Source: Bloomberg CityLab (06/23/22) Capps, Kriston

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