Housing correction is 'dead ahead,' warns Moody’s chief economist Mark Zandi — here’s how he sees things playing out over the next several months

Spiking mortgage rates

Mortgage rates continue to climb as interest rates rise further, with some forecasting in the short-term a rise of 3.25%. On a 30-year fixed-rate loan, mortgage rates are now sitting at about 6%.

As these rates rise, mortgage payments can be several thousand dollars higher than they were a year ago, Zandi says. And this loss of affordability is exactly why he sees a correction in the near future.

“If we stay around six I think that the market will adjust and we’ll eventually get that correction. If it goes much higher than that we’ll get a more significant pullback in the housing market.”

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First-time home buyers locked out

Fed Chairman Jerome Powell on June 14 told millennials and other first-time homebuyers that right now is not the time to invest in housing. He said in his speech that prices may continue to climb for a while, as it continues to be a “tight market.”

“If you are a homebuyer, or a young person looking to buy a home, you need a 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 low again, and mortgage rates are low again.”

Yet even as the Federal Reserve continues to work “really hard” to slow the economy’s growth in inflation and mortgage rates, housing prices keep rising. Housing is the most rate-sensitive sector of the economy, Zandi says, and therefore is likely to be the first to feel the effects of inflation.

And that includes slowing housing prices as mortgage rates continue to rise.

“This is to script, so far, exactly what the Fed would want to see.”

Institutional investment in housing here to stay

Meanwhile, institutional fund giants like Blackstone and Brookfield are buying up houses to rent them out at high rates — something that Zandi believes is likely here to stay, even with higher mortgage rates. That’s because these institutions have raised a significant amount of capital in recent years and need ways to deploy it prudently. And investing long-term in real estate is the perfect option.

Zandi suggests these long-term investments are why we’re unlikely to see a housing crash. These are long-term investments that won’t be sold overnight, creating stability in the market.

“I think this is a business model that works. I don’t think they’re going to sell. They may not buy in this environment, they may wait and see how things shake out.”