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Housing economist: Home prices to ‘move sideways’ as Fed boosts rates

One upside of a slowing housing due to the Federal Reserve's inflation-fighting tactics could eventually be prices, according to one expert.

“From my perspective, I see at least having homes price-wise move sideways as a real benefit, as long as incomes keep rising,” George Ratiu, Realtor.com's manager of economic research, told Yahoo Finance (video above).

But if “inflation lasts longer into next year than the Fed anticipates, that could further erode purchasing power,” he added.

LOS ANGELES, CA - SEPTEMBER 22: A 'for sale' sign is displayed  in front of a new townhouse style home on September 22, 2022 in Los Angeles, California. The U.S. housing market is seeing a slow down in home sales due to the Federal Reserve raising mortgage interest rates to help fight inflation. (Photo by Allison Dinner/Getty Images)
A 'for sale' sign is displayed in front of a new townhouse style home on September 22, 2022 in Los Angeles, California. The U.S. housing market is seeing a slow down in home sales due to the Federal Reserve raising mortgage interest rates to help fight inflation. (Photo by Allison Dinner/Getty Images)

To rein in high inflation, the central bank has boosted interest rates this year, which in turn, has caused the housing market to cool as mortgage rates increase. Fed Chairman Jerome Powell hinted at his last meeting that the housing market needs a correction and believes it can be adjusted in a way that people could still afford homes again.

“Powell has taken away the punch bowl away from the housers in this market,” SitusAMC Managing Director Tim Rood told Yahoo Finance Live following Powell's latest meeting.

U.S. mortgage rates have climbed to the highest level since July 2007 in response to the Fed’s monetary tightening, with the 30-year-fixed rate home loans averaging 6.70% last week, up a massive 0.41 percentage point from a week ago, according to Freddie Mac.

Rates have increased by more than 1.5 percentage points over the last six months alone and the 30-year rate has more than doubled since January. While home price gains remain high year over year, price growth in the U.S. slowed by the largest amount on record in July.

Home sales have also slowed as borrowing costs have increased.

Data from the National Association of Realtors’ index shows that pending home sales decreased 2.0% from a month earlier, notching the third consecutive month of declines. At the same time, builder sentiment has dropped for the ninth month in a row this year.

According to Powell, “we’ve probably in the housing market got to go through a correction to get back” to a place where supply and demand could correlate. Powell explained that it will take some time for home prices and rents to cool even more and his message is to “hope for the best, plan for the worst.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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