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Fortune
The Fed’s housing market ‘reset’ has us in a housing correction. Here’s what to expect next
Lance Lambert
Updated 5 min read

Through the first 24 months of the pandemic, U.S. home prices soared 38.5%. In some markets, like Phoenix and Dallas, home prices grew by more than 50%.

The Federal Reserve wasn't a fan. As the pandemic housing boom raged along, it pushed up prices across the economy. Higher home prices pushed up rents. Elevated homebuilding levels—which hit a 15-year high during the pandemic—put upward price pressure on everything from windows to lumber while also adding stress to an already stressed global supply chain. Not to mention, cash flowed into the economy from homeowners who tapped into that record home equity.

That's why the central bank, who has a mandate from Congress to tackle runaway inflation, has targeted the U.S. housing market. How? It put immense upward pressure on mortgage rates. While the Fed doesn't directly set mortgage rates, it has the levers to see that financial markets do so. Once the Fed made it clear this year what lay ahead for monetary tightening, markets quickly pushed the average 30-year fixed mortgage rate above 5%.

In June, Fed Chair Jerome Powell finally made it clear this is all by design. Powell would like to see the U.S. housing market return to a more balanced state. In his own words, he calls it a "reset."

"I'd say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again," Powell told reporters last month. "We saw [home] prices moving up very, very strongly for the last couple of years. So that changes now. And rates have moved up. We are well aware that mortgage rates have moved up a lot. And you are seeing a changing housing market. We are watching it to see what will happen. How much will it really affect residential investment? Not really sure. How much will it affect housing prices? Not really sure."

Already, spiking mortgage rates have pushed the U.S. housing market into cool-down mode. As April and May housing data trickled in, it became clear the pandemic housing boom was fizzling out. In June and July, the pace of the cooling picked up.

To find evidence of the accelerated rate of cooling, just look at inventory data. Among the nation's 100 largest housing markets, the median market saw inventory rise 1% between January and April, according to Fortune's analysis of realtor.com data. That was before spiking mortgage rates kicked off the housing correction. Among those same 100 largest housing markets, the median market saw inventory rise 50% between April and June.

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