The housing market just slid into a full-blown correction, says top economist Mark Zandi

Moody's Analytics chief economist Mark Zandi is ready to call it. He tells Fortune that we've officially moved from a housing boom into a "housing correction."

The real estate data rolling in for April and May shows that the U.S. housing market is softening. New home sales fell 19% to their lowest level since April 2020. Redfin reports 19% of home listings cut their price over the past month. Inventory is rising fast, while mortgage applications and existing home sales are also falling.

This drop-off isn't a result of seasonality, or a soft month or two. Zandi says it's a trajectory flip: Demand is pulling back—fast—in the face of mortgage rates that have spiked dramatically.

"The housing market has peaked…everything points to a rolling over of the housing market," Zandi says. "In terms of home sales, they're falling sharply. Housing demand is coming down fast. Home price growth [will] go flat here pretty quickly; we will see [home] price declines in a significant number of markets."

Unlike a stock market correction, which means a greater than 10% drop in equities, Zandi says a "housing correction" means the end of the housing boom and the beginning of a period where home prices will fall in some regional markets. Over the coming 12 months, he expects year-over-year home price growth to be 0%. If that comes to fruition, it'd mark the worst 12-month stretch since 2012. It would also be whiplash for real estate agents and brokers who've watched home prices soar 19.8% over the past year.

This is all by design. The Federal Reserve has a dual mandate from Congress: Keep both unemployment and inflation low. Of course, with the jobless rate at 3.6% and the latest CPI reading at 8.3%, it's obvious which mandate the Fed has shifted its attention to: inflation. In the Fed's mind, if it can end the housing boom, it can slow down overall price growth. That's why the Fed hit the housing market with an economic shock of higher mortgage rates.

A historically 'overvalued' housing market

The Fed won't be appeased with simply slowing home sales, Zandi says. It will also want home construction to slow. Elevated home construction, which this year hit its highest level since 2006, has put upward pressure on everything from lumber to steel to kitchen tables. If the housing market heats back up before inflation has been tamed, Zandi says, the Fed would simply push mortgage rates even higher. Already, over the past five months the average 30-year fixed mortgage rate has spiked from 3.11% to 5.1%.

To be clear, Zandi doesn't see a 2008-style housing bust or foreclosure crisis. While the spike in mortgage rates has pushed the housing market into the upper bounds of affordability, we don't have the credit issues that plagued us last time. Homeowners are financially better off than they were in the lead-up to the 2008 financial crisis. This time around, Zandi says, we also don't have widespread subprime mortgages. Also, if nationwide home prices do begin to plummet, he says, the Fed could always ease up on mortgage rates.

That said, Zandi says some regional housing markets have become historically "overvalued" and could see home prices decline 5% to 10% over the coming year. If a recession does come, Zandi says price drops in those markets could grow to between 10% to 20%.

View this interactive chart on Fortune.com

Among the nation's largest 392 housing markets, 96% have home prices that are "overvalued" relative to what local incomes can support. That's the finding from Moody's proprietary analysis of U.S. housing markets. Among those 392 markets, 149 are overvalued by at least 25%. That includes Boise, where home prices are 73% above what Moody's says economic fundamentals support.

Zandi says the extremely "overvalued" housing markets like Boise and Phoenix are at the highest risk of falling home prices over the coming year. So are numerous markets throughout the Mountain West, Southwest, old South, Carolinas, Florida, and Texas.

While Zandi said he doesn't think nationwide home prices will drop, he says they're likely to see "real" home price declines. That's economic speak for inflation growing faster than U.S. home prices.

"Inflation will still be positive. If inflation is at 8% and home prices go nowhere, then home prices decline 8% in real terms," Zandi says. Now that home prices have become "overvalued" we're set to enter into a period where both income growth and inflation outpace home price growth, he say. For home shoppers who've been priced out by the pandemic's housing boom—which saw U.S. home prices soar 34.4% since February 2020—that's not exactly bad news.

The housing market is shifting—fast. If you're hungry for more housing data, follow me on Twitter at @NewsLambert.

This story was originally featured on Fortune.com