Written by Lance Lambert

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The pandemic's housing boom is finally running on fumes. Home sales are falling. Inventory levels are rising. And home sellers are cutting list prices at the fastest clip since 2019.

This Great Deceleration is a lot bigger than a seasonal cooldown. The economic shock of higher mortgage rates means borrowers are getting stretched thin to a degree unseen since 2006. That's why home shoppers in April and May finally balked at record home prices. This shift, Moody's Analytics chief economist Mark Zandi tells Fortune, is the start of a full-blown housing correction. Zandi predicts the year-over-year rate of U.S. home price growth will plummet from the all-time high of 20.6% to 0% by this time next year.

On Wednesday, we learned that U.S. purchase applications last week were 20.5% lower than the same week in 2021, according to the Mortgage Bankers Association. Compared to the height of the pandemic housing boom, purchase applications are down 40%.

On Thursday, Freddie Mac deputy chief economist Len Kiefer tweeted about what this downward shift means: "The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006."

This housing slowdown, of course, is by design. Earlier this year, financial markets, in response to Federal Reserve actions, priced up mortgage rates. That saw the average 30-year fixed mortgage rate spike from 3.11% in December to 5.09% as of last week. In the eyes of the Fed, if it can slow down the housing market—a major driver of inflation—it can begin to rein in overall inflation.

This sharp contraction in mortgage applications is similar to the one that began in 2006. That, of course, turned out to be the onset of a housing slump that culminated in a nationwide housing bust in 2008. But Zandi doesn't think we're headed back there. This time around, homeowners are in much better financial shape. Additionally, he says, this historic run wasn't underpinned by a credit rush of bad mortgages like we saw in the early 2000s.

Zandi doesn't foresee U.S. home prices falling nationally over the coming year. However, he forecasts this "housing correction" will likely result in 5% to 10% price reductions in significantly "overvalued" housing markets like Boise and Charlotte.

Logan Mohtashami, lead analyst at HousingWire, was publicly pushing for higher mortgage rates heading into 2022, his view being that "the savagely unhealthy" housing market needed to be cooled in order for inventory to rise. The historically low levels of inventory reached during the pandemic gave homebuyers little choice but to bid up prices. If we're going to return to a healthy housing market, Mohtashami predicts, we need to see national inventory rise to a range between 1.52 million and 1.93 million units. The National Association of Realtors’ latest reading has inventory at just 1.03 million units.

"My concern in the future is if the rates fall again, some of the inventory gains we had will go away,” Mohtashami tells Fortune.