(The Hill) — The U.S. housing market could be heading toward a correction after more than two years of massive price growth that has more recently been offset by the Federal Reserve’s attempt to curb inflation by raising interest rates. The central bank’s effort has led to a sharp rise in mortgage rates, a decline in the number of homes under contract, and a record monthly price growth slowdown in September of 2.6 percent. 

A correction would allow buyers to spend more time on the market and possibly have less competition for homes, but experts say the recent price drops may not be enough to offset high mortgage rates combined with historic price increases during the pandemic. 

National housing market corrections are rare, economists told The Hill. Though there is no set definition, the experts said the market is in a correction when changing conditions cause home prices to drop. 

“We are seeing that now as home values at the national level have fallen a bit from their June peak, part of a rebalancing of the housing market as prospective buyers are pulling back because of soaring costs and sellers are reacting by lowering their list price or accepting a lower offer on their home,” Zillow senior economist Jeff Tucker told The Hill in an email. 

“But home values are nowhere near a 10% decline from peak levels nationally,” Tucker said, noting that a correction in the stock market refers to a decline of 10 percent or more from peak levels. 

Average home prices fell by 0.4 percent in September to $358,283 from their June peak at $359,719, according to Zillow data.

Yelena Maleyev, an economist with KPMG Economics, told The Hill in an email that the recent price declines can be viewed in the context of the unusually fast price growth over the last two years.  

“Due to pandemic-related distortions, home prices grew at a historically fast pace over the last few years. This has led to many markets around the country to be considered overvalued,” Maleyev said. 

“According to Moody’s research, over half of the country’s housing markets are overvalued as of the middle of this year. This leaves a lot of room for those markets specifically to see their home prices come back down to Earth,” she added. 

Some of these price declines have been seen in metros where prices soared during the pandemic, and especially those to which remote workers flocked for lower costs of living. 

Data released last week by the National Association of Realtors showed home prices increased in most U.S. metros last quarter. Seven of the top 10 metros experiencing the biggest price gains were in Florida, where the typical price jump was more than 18 percent, and half of the nation’s most expensive markets were in California. 

Nationwide, prices for an existing, median-priced single-family home rose by 8.6 percent from last year to $398,500, despite the current price slowdown.  

Even as buyers are seeing some relief from slight price declines, soaring mortgage rates continue to push homeownership out of reach for many Americans. 

Since the Federal Reserve began its series of aggressive interest rate hikes, mortgage rates have more than doubled. The rate for a 30-year fixed-rate mortgage rose above 7 percent again last week after falling slightly a week earlier. 

These rates are driving up payments, and recent data shows that average monthly mortgage payments have risen by nearly 50 percent from pre-pandemic levels. 

Average monthly payments have increased by more than $600, bringing the monthly payment on a typical single-family home to $1,840 after a 20 percent down payment. 

Federal Reserve Chairman Jerome Powell told reporters following the central bank’s latest interest rate hike earlier this month that the agency is aware of the negative impact the Fed’s activity is having on the housing market.

“Housing is significantly affected by these higher rates, which are really back where they were before the global financial crisis. They’re not historically high, but they’re much higher than they’ve been,” Powell said. “We do understand that that’s really where a very big effect of our policies is.” 

High rates also mean that a price correction may not be a major benefit to buyers for two main reasons, Taylor Marr, deputy chief economist for the real estate company Redfin, told The Hill.

“The first is that any drop in home prices so far has yet to fully offset the rise in mortgage rates, leaving homebuyers’ monthly mortgage payment still much higher than when rates were lower at the start of the year,” Marr said in an email.

“If home values do begin to fall enough to offset the rise in rates, buyers will also be dissuaded from buying a home that is falling in value—no one wants to catch a falling knife and risk being the greater fool,” he added. 

Still, there could be a bright spot for buyers even if high mortgage rates counteract some of the positive impacts of price declines. 

“This small price dip isn’t helping buyers breakthrough. The impact of higher mortgage rates far outweighs the impact of slightly lower prices,” Tucker said.

“The silver lining for buyers is the reduced competition rather than anything related to the cost of a home,” Tucker added. “Buyers who can overcome affordability hurdles and remain in the market will have less competition and more time to consider their options, which is a stark change from last year when bidding wars were the norm.”