[ad_1] When Federal Reserve Chairman Jerome Powell talked about a housing reset in June, it sent shockwaves around the country because it sounded so ominous. In the most recent FOMC meeting, held last week, Powell finally clarified what he meant by that term and what a housing reset means to the Fed. However, a housing reset isn’t the only pressing issue — we now also have to think about a worldwide global recession. To put it as simply as I can, the strength of the U.S. dollar is causing too much pain worldwide, and traditionally something breaks when this happens. China is in a mess, Europe has an energy crisis, and the wild card of Russia’s war in Ukraine is still unresolved, all while the Fed is aggressively hiking rates. Savagely unhealthy is no longer just a term for the U.S. housing market — it now applies to the world economy. As I noted during my recent podcast on HousingWire, things are getting sloppy in the markets, and when chaos happens, you can’t ever be sure how bad the damage is going to be. Over the weekend, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said, “We are going to do all that we can at the Federal Reserve to avoid deep, deep pain.” It’s never a good thing when you have to qualify pain like that.What a housing reset means Let’s take Chairman Powell’s words from the FOMC’s Q&A session on Sept. 21 and discuss what a housing reset means. Powell: So when I say reset, I’m not looking at a particular, specific set of data or anything… This isn’t true (just look at his next statement, below) — he really wants the bidding wars to end, and for total inventory to grow and regain balance. I can understand this mindset. As you can see below on the NAR total inventory chart, we didn’t have a seasonal push in inventory in 2020, which left us vulnerable to price growth that was above the historical norm. Powell: 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 selling to the first buyer at 10% above the ask, before even seeing the house… As you can see, Powell quickly outlines precisely what he doesn’t want to see: massive bidding wars for housing. He wants to see balance. This is something I have talked about on HousingWire for some time. We lost balance in the housing market, and an unhealthy housing market became savagely unhealthy in 2022. Powell: So, there was a big imbalance between supply and demand and housing prices were going up at an unsustainably fast level. So the deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals, and that’s a good thing. Home-price growth was way too hot to start the year, and home prices falling is sticky unless you have a massive increase in supply and forced selling. Home price growth in 2022 is cooling down from 2021 levels, but it will still be positive and higher than I would like to see. The S&P/CoreLogic Case Shiller Index is coming out this week; this data line lags the current market, but expect a cool down in price growth data here. Powell: 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, at a reasonable pace, and that people can afford houses again, and I think we, so we probably in the housing market have to go through a correction to get back to that place. Now my personal working thesis is that the housing market can functionally work once total Inventory data can get between 1.52 – 1.93 million. Once we hit the top-end number of 1.93 million, I can remove the savagely unhealthy theme. Any parts of the U.S. already into the 2019 inventory range are already out of the savagely unhealthy housing market because they have choices. While this isn’t a 2022 story for national inventory levels, the last report of the NAR showed a decline from 1.31 million to 1.28 million levels. We are still going to start 2023 in a better place with inventory than what we started 2022 in. . Powell: There are also longer run issues though with the housing market. As you know, we’re, it’s difficult to find lots now close enough to cities and things like that, so builders are having a hard time getting zoning and lots, and workers and materials, and things like that. But from a sort of business cycle standpoint, this difficult correction should put the housing market back into better balance. This is almost useless; the housing market has already gone into a recession, and the builders are done building anything new until they get rid of the excess supply they already have. New home sales are coming this week, and the monthly supply data is too big to have any new construction being built. We have 10.9 months of housing supply with 9.84 months in construction. The builders will take their time finishing these homes and ensuring they sell them at a price that is useful for their business model. Powell: I think that shelter inflation is going to remain high for some time. We’re looking for it to come down, but it’s not exactly clear when that will happen. So, it may take some time, so I think hope for the best, plan for the worst. So I think on shelter inflation you’ve just got to assume that it’s going to remain pretty high for a while. Some data lines show that the growth rate is cooling off. The CPI shelter inflation data will show this in 2023, not this year. The Fed knows this. Here is a clip of my take on CNBC on this subject. Look for shelter
