Back in June, Fed chair Jerome Powell announced plans to “reset” the housing market, increasing the likelihood of falling home prices. In the months that followed, economists questioned Powell’s use of the term “reset.”
On Thursday, CNN business reporter Nicole Goodkind prompted Powell to clarify, to which he gave a lengthy explanation.
“When I say reset, I’m not looking at a particular specific set of data,” Powell said. “What I’m really saying is that we’ve had a time of a red-hot housing market all over the country, where famously houses were sold to the first buyer at 10% above the asking even before seeing the house. That kind of thing. So there was a big imbalance between supply and demand. Houses were going up at an unsustainable fast level.”
Related: Is a Housing Market Correction Finally Underway?
As the Fed has increased interest rates to tame inflation, the housing market has begun to slow down. The so-called “reset” or housing correction is intended to spread throughout the economy and bring down inflation. When mortgage rates are raised, home sales decline, which also causes a fall in demand for durable goods and services, which in turn weakens the labor market and ultimately tames inflation.
“For the longer term, what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level and at a reasonable pace and that people can afford houses again,” Powell continued. “[The] housing market [has] to go through a correction to get back to that place.”
While Powell wants to see a “reset” to a more balanced housing market, the aggressive push could cause housing construction to fall, which could lead to an increased housing supply deficit — the opposite of the intended plan.
“As you know, it is difficult to find lots now close enough to cities, so builders are having a hard time getting zoning and lots and workers and materials and things like that,” Powell said. “But from a business cycle standpoint, this is difficult [housing] correction should put the housing market back into better balance.”