The Fed is embracing a possible housing-market correction as a way to get ‘red-hot’ prices back to a more sustainable level

The housing market isn't doing well. It is what the Fed ordered.

The US economy is in a critical time as the market is falling back to earth. The Fed raised interest rates in order to cool demand and bring inflation down. It can take several months for the effect of such increases to be felt.

The housing market has reacted quickly. Over the last few months, activity in the sector has weakened due to higher mortgage rates. The US has had a "red-hot housing market" for a long time, and lower prices will help the Fed fight inflation, he said.

"Supply and demand need to be aligned so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again," the chair said. The housing market needs to go through a correction to get back to where it was.

The correction has started. Sales of new and previously-owned homes fell to multi-year lows through the summer as mortgage rates soared. Home values have already fallen in some cities due to the easing of price growth.

Homebuilder outlooks are still gloomy despite the fact that the slump doesn't resemble the 2008 financial crisis. The National Association of Home Builders and Wells Fargo Housing Market index fell further into recession in September.

The downturn is expected to go on for another two years. The Fed raised rates for the third time in a row on Wednesday. The Federal Open Market Committee projected that the central bank will raise the federal funds rate by three-quarters of a point in November and by half a point in December. Demand for homes is likely to fall even further as the Fed's benchmark rate continues to rise.

Home inflation is still being experienced in more metropolitan areas. In 13 of the country's 20 largest cities, home prices have gone up in the past year, with Miami, Chicago, and Tampa leading the way. Home deflation is a problem in just six cities.

Structural problems in the market are causing prices to go up. Shortages of construction workers, building lots, and materials are holding back construction of much needed home inventory. That has contributed to a decline in housing permits, with approved projects falling to an average of 1.5 million units per year. The lowest was in June 2020.

Powell said that a housing recession could help.

The housing market should be in better shape from a business cycle perspective.