The housing market just slipped into a full-fledged correction, says economist Mark Zandi

Moody’s Analytics Chief Economist Mark Zandi is ready to give you a call. He says Fortune that we have officially gone from a housing boom to a “housing fix.”

Housing data for April and May show that the US housing market is weakening. New home sales fell 19% to their lowest level since April 2020. Redfin reports that 19% of home listings reduced in price in the past month. Inventory is rising rapidly, while mortgage applications and existing home sales are also falling.

This drop is not the result of seasonality, or a weak month or two. Zandi says it’s a change of trajectory: demand is receding, rapidly, in the face of mortgage rates that have skyrocketed dramatically.

“The housing market has peaked…everything points to a turnaround in the housing market,” says Zandi. “In terms of home sales, they are falling sharply. Demand for homes is falling rapidly. Home price growth [will] go flat here pretty quick; We will see [home] price declines in a significant number of markets.

Unlike a stock market correction, which means a more than 10% drop in stocks, Zandi says a “housing correction” means the end of the housing boom and the beginning of a period in which Home prices will fall in some regional markets. Over the next 12 months, he expects year-over-year home price growth to be 0%. If that comes to fruition, it would mark the worst 12-month stretch since 2012. It would also be a whiplash for real estate agents and brokers who saw home prices soar 19.8% over the past year.

All of this is by design. The Federal Reserve has a dual mandate from Congress: to keep both unemployment and inflation low. Of course, with the unemployment rate at 3.6% and the latest CPI reading at 8.3%, it is obvious which mandate the Fed has turned its attention to: inflation. In the Fed’s view, if it can end the housing boom, it can slow overall price growth. That’s why the Fed hit the housing market with an economic shock higher mortgage rates.

A historically ‘overvalued’ real estate market

The Fed will not appease simply by slowing home sales, says Zandi. You’ll also want home construction to slow. High-rise housing construction, which this year reached its highest level since 2006, has put upward pressure on everything from wood to steel to kitchen tables. If the housing market heats up again before inflation has been brought under control, Zandi says, the Fed would simply raise mortgage rates even higher. In the past five months, the average 30-year fixed mortgage rate has skyrocketed from 3.11% to 5.1%.

To be clear, Zandi doesn’t see a 2008-style housing crash or foreclosure crisis. While rising mortgage rates have pushed the housing market to the upper limits of affordability, we don’t have the credit problems that they plagued us last time. Homeowners are better off financially than they were before the 2008 financial crisis. This time, Zandi says, we don’t have widespread subprime mortgages either. Also, if home prices across the country start to plummet, he says, the Fed could always cut mortgage rates.

That said, Zandi says that some regional housing markets have historically been “overvalued” and could see home prices drop 5% to 10% over the next year. If a recession hits, Zandi says price declines in those markets could increase by 10% to 20%.

See this interactive chart on Fortune.com

Among the 392 largest housing markets in the country, 96% have home prices that are “overvalued” relative to what local incomes can support. That’s the conclusion of Moody’s property analysis of US housing markets. Among those 392 markets, 149 are overvalued by at least 25%. That includes Boise, where home prices are 73% above what Moody’s says economic fundamentals support.

Zandi says extremely “overvalued” real estate markets like Boise and Phoenix are at the greatest risk of falling home prices over the next year. So are numerous markets in the Mountain West, Southwest, Old South, Carolinas, Florida, and Texas.

While Zandi said he doesn’t think home prices across the country will go down, he says they’re likely to see “real” drops in home prices. That’s economics jargon for inflation growing faster than US home prices.

“Inflation will remain positive. If inflation is 8% and home prices are going nowhere, then home prices are down 8% in real terms,” ​​says Zandi. Now that home prices have become “overvalued,” we are poised to enter a period where both income growth and inflation outpace home price growth, she says. For homebuyers who have been hit by the pandemic housing boom, which has sent US home prices soaring 34.4% since February 2020, it’s not exactly bad news.

The real estate market is changing, fast. If you’re hungry for more housing data, follow me on Twitter at @NewsLambert.

This story originally appeared on Fortune.com

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