Higher interest rates have notably cooled the housing market in recent months, as many buyers have been priced out of the market due to a combination of those larger interest rates and higher home prices. As a result, many properties are sitting longer and seeing price reductions in an effort to sell—but bigger cuts could soon be coming.

Speaking to a group at the University of Kentucky, Fed Governor Christopher Waller stated that while the Federal Reserve still sees the increase in rates making the correction mild, the possibility that a larger drop will occur is still very much in the picture.

"While this [housing] market correction could be fairly mild, I cannot dismiss the possibility of a much larger drop in demand and house prices before the market normalizes," he said.

However, while prices could drop, he assured that it wouldn't lead to a similar meltdown that led to the 2008 recession and housing crisis.

"Despite the risk of a material correction in house prices, several factors help reduce my concern that such a correction would trigger a wave of mortgage defaults and potentially destabilize the financial system," he said. "One is that because of relatively tight mortgage underwriting in the 2010s, the credit scores of mortgage borrowers today are generally higher than they were prior to that last housing correction. Also, the experience of the last correction taught us that most borrowers only default when they experience a negative shock to their incomes in addition to being underwater on their mortgage."

This marks the first time anyone from the Fed has acknowledged that prices could fall more substantially, as several markets have already seen their home values start to fall from their 2022 peaks.

Previous data on home sales showed that pandemic hot markets like Phoenix, Tampa and Boise, Idaho have since cooled significantly, with data collected by Redfin showing a 31.9% decline in sales in Phoenix year-over-year, 29.1% in Boise and 18.3% in Tampa.

Sales were actually down in all markets Redfin analyzed, with equally steep drops in places like Anaheim, California (30.1%), Las Vegas (37.2%), San Jose, California (33.8%), Seattle (30.8%) and San Francisco (29.6%).

However, prices were still up in nearly all markets still at the time, with the exception of San Francisco, where prices dropped 7.3% year-over-year. The higher prices, combined with increased rates which hit 6.97% Friday, could force even more buyers to sit the market out, making the drop in prices necessary since the Fed is not likely to drop rates again anytime soon.

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