Housing Advocates Urge the Federal Reserve to Halt Interest Rate Hikes
In a collaborative effort, NAR along with two other influential housing organizations have voiced concerns to Fed Chairman Jerome Powell about the consequences of continuous rate hikes. Their message is clear: there's a potential risk of a recession if the trend continues.
Recently, mortgage rates soared, marking their highest in nearly a quarter-century. Consistently surpassing 7%, there's a looming apprehension they might inch towards the 8% mark. Such escalating concerns have propelled housing advocates to question the Federal Reserve's monetary strategies.
Key players including the National Association of REALTORS®, the National Association of Home Builders, and the Mortgage Bankers Association collectively penned a letter to Chairman Powell. Their contention is that the uncertain trajectory of the Fed’s rates is catalyzing the spikes in mortgage rates, leading to market instability. They highlight that this volatility is negatively impacting housing affordability and is proving challenging for a real estate market already grappling with significant dips in mortgage issuance and home sales.
The correspondence emphasizes the double jeopardy faced by potential home buyers as these market hindrances coincide with an unprecedented scarcity in affordable housing stock.
As per the MBA's observations, the current demand for home mortgages is at its lowest since the mid-90s. A recent update from Freddie Mac stated the average for a 30-year fixed-rate mortgage at 7.49%. Market insights from Moody Analytics suggest the looming possibility of the rate crossing the 8% threshold based on evolving investor outlooks.
Decoding the High Rates A known fact is that mortgage rates often shadow 10-year Treasury yields. Yet, there's an unusually wide gap between these rates and the yields as market players anticipate the Federal Reserve's forthcoming decisions. With the Fed having ramped up interest rates 11 times over the past year to tackle inflation, there was a momentary halt in September. Still, there's speculation of another hike before year's end, with their subsequent assembly scheduled for the end of October.
In this backdrop, the trio of NAR, NAHB, and MBA highlight an additional monthly financial burden of $245 for buyers availing a standard $300,000 mortgage, attributing it to the mortgage-to-Treasury rate disparity. The consortium’s warning is stern: continuous rate hikes could potentially dampen economic expansion, amplifying the chances of an economic downturn.
Balancing Growth & Stability The housing sector is pivotal, comprising nearly 16% of the U.S. economy. As such, the associations emphasize the importance of the Federal Reserve offering clarity on its rate directions to prevent destabilizing the housing market.
Despite the Federal Reserve's stance on awaiting the Consumer Price Index (CPI) to hit its 2% benchmark before halting rate increases, September witnessed Powell recognizing efforts towards inflation control but demanding continued vigilance. A recent survey from Bankrate.com revealed that a significant portion of real estate experts believe the targeted inflation rate might only stabilize by the end of 2025.
Continued high shelter costs have been a significant contributor to the current inflation rates. The associations' letter underscores that bolstering the construction of affordable homes would be instrumental in managing these shelter costs, thereby supporting the broader fight against inflation. The ongoing high-interest rate scenario could jeopardize these efforts, further tightening the housing supply and making homeownership elusive for many.
While recent job statistics reflect an economy that's showing resilience with 4 million more job openings compared to pre-pandemic times, the situation isn't entirely rosy. NAR's Chief Economist, Lawrence Yun, cautions against undue optimism. He believes that the relentless surge in interest rates could jeopardize multiple economic sectors. His recommendation? Given the receding inflation rate, it's imperative for the Federal Reserve to reconsider its rate hikes and potentially contemplate rate reductions in the coming year, ensuring a more stable economic trajectory.
Despite the current challenges faced by the housing market, various indicators suggest a positive turn in the upcoming 18 months. Economists and housing experts are pointing to a confluence of factors that may lead to a more stabilized environment. Technological advancements in the real estate and construction sectors are expected to make home buying and building more efficient and affordable. Additionally, as the economy continues to adapt to post-pandemic norms, consumer confidence seems poised to rebound, fostering an environment conducive to investment. There's also growing optimism around potential government policies that could incentivize housing construction and home ownership. Collaboration between housing associations and policymakers, combined with innovative financial products, may very well pave the way for a resilient and thriving housing market in the not-so-distant future.