According to Mark Zandi, chief economist of Moody’s Analytics, home prices are much higher today than they were a year ago. To get housing prices back on track, three factors must occur simultaneously.

The fundamental problem, according to Zandi, is that affordability has been completely hammered, and the high mortgage rates combined with previously high house prices make things too difficult. According to him, for the market to ease the affordability crisis, three things must be seen: lower mortgage rates, lower house prices, and rising incomes.

The Federal Reserve has outlined a 5% Federal Funds Rate target, which is now embedded in market expectations, which, according to Zandi, will eventually lead to a decline in mortgage rates back to 5%-5.5%. He noted that the mortgage rates above 7% from just months ago likely signaled the peak.

There has been a $200 reduction in the average mortgage payment since several weeks ago, so homebuyers now have their purchasing power renewed. The recent six consecutive weeks of declining mortgage rates mark the longest streak since 2008.

According to Zandi, home prices would have to decline roughly 10% to become affordable if US incomes continue to rise and the economy avoids a recession. He added that, most likely, it will not happen until late 2024 going into 2025. In his opinion, it will take a couple of years before affordability reaches a point where demand will start to rise again.