Federal Reserve Chairman Jerome Powell said that the U.S. housing market will probably face a reset after a period of "red hot" price increases that have put home ownership out of reach for many Americans.
The average contract rate for a 30-year fixed rate mortgage had already hit an historically high 6.25 percent last week to a level not seen since the Great Recession, said the Mortgage Bankers Association (MBA).
The Fed Chair spoke on housing prices after the central bank wrapped up its Federal Open Market Committee meeting on Sept. 21, in which it raised interest rates by another 75 basis points to fight high inflation.
August's Consumer Price Index (CPI) showed an inflation rate higher than expected at 8.3 percent.
"There was a big imbalance ... housing prices were going up at an unsustainably fast level," Powell said.
Frustration in Housing SectorSome market traders like Scott Maragioglio blamed the Fed for the current housing market price situation.
Many in the real estate market have been negatively affected by the rate increases this year, which caused mortgage rates to skyrocket, worsening an already tight housing market.
The Fed allowed massive amounts of cheap credit and money to enter the economy during the pandemic era to resuscitate the flagging economy, which encouraged a housing boom.
Many analysts blame the Fed for failing to react in time to growing inflation, allowing the housing market to get too hot until it was too late.
"Getting people to pile into it thinking they needed shelter from a monetary crash which was never coming."
The benchmark rate is now at 3 to 3.25 percent—the highest since 2008.
Fed policymakers have indicated they will continue hiking rates above current levels until inflation is hopefully tamed when it either hits a “terminal rate” or an end point of 4.6 percent in 2023.
Since March, the Fed has raised interest rates from near-zero to the most hawkish increases since it started using the overnight funds rate as its principal policy tool in 1990.
The last time central bank policy rates were this high was in 1994, when they hit 2.25 percentage points before rates were cut in July of the following year.
The rate hikes are beginning to have a gradual impact on the housing sector by slowing home sales, raising rents, and slightly bringing prices down.
Powell noted that rents and other shelter costs will remain high for some time, which could prop up inflation for a while as they functions as a major driver of consumer prices.
Shelter costs, which are a gauge of home prices known as owners’ equivalent rent, accounted for 25 percent of August's overall inflation rate.
Several economists expect CPI housing inflation to eventually drop, as rent rate increases for new leases appear to be slowing.
Mortgage Rates And The Housing MarketRising mortgage rates have put increasing pressure on the interest rate-sensitive housing sector as the Fed pursues its aggressive stance on raising borrowing costs.
The 30-year fixed rate mortgage is the most popular home loan for homebuyers, but the latest increases have deterred most first-time buyers from entering the market, leading to a major slump.
Homeowners with adjustable-rate mortgages have also been affected by borrowing rate increases, as their monthly payments ratchet up each year that interest rates rise.
Meanwhile, Fed tightening has led to a surge in Treasury yields since the start of this year, of which the yield on 10-year Treasury notes acts as a benchmark for mortgage rates.
The Fed’s moves tend to affect mortgage rates indirectly, by influencing the expectations of lenders and financial markets.
Stubbornly high inflation has led traders to believe that interest rates will be higher for now, as seen in the increase since early August.
The Fed also announced that it will keep its promise to pare holdings of mortgage-backed securities by about $35 billion a month, which will lead to even higher interest rates.
The Dow tumbled 522.45 points after the Fed announced it would keep raising interest rates.
There is still a chance, if inflation is not brought under control, that the Fed may have to increase rates by a larger percentage at its next meeting in November.
The latest news from the Atlanta Fed suggests that U.S. GDP will have zero growth for the third straight quarter this year.