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Fed Is Staying the Course on Interest Rates, Housing Is Feeling the Impact

Details: Published: 09 November 2022

The overheated employment market appears to be cooling off, but probably not fast enough to demonstrate the progress the Federal Reserve wants to see in its efforts to combat inflation, still growing at an uncomfortable 8 percent annual rate.

Employers added 261,000 jobs in October, beating analysts’ projections but falling below the 315,000 added in September. The unemployment rate inched higher, to 3.5 percent, but wage growth – one of the Fed’s inflation markers – remained strong, with hourly earnings coming in 4.7 higher than a year ago.

“What I see in this is the imprint of beginning weakness. But it’s not enough to derail the Fed.” Diane Swonk, chief economist at KPMG, told NB C News.

The October employment report came two days after the Fed announced its fourth consecutive rate increase ─ another .75 percent jolt ─ pushing the Fed’s target range to 3.75 percent to 4 percent, the highest level in 14 years. This is the sixth time the Fed has increased rates this year, and Fed chair Jerome Powell made it clear that there are more increases to come, as the Fed remains hyper-focused on inflation.

“Still A Ways to Go”

The employment market remains “overheated,” Powell told reporters, “[so] it is very premature to think about pausing” the Fed’s interest-rate driven inflation fight. While future rate increases may be smaller, he said he offered no assurances on that front, emphasizing, “We have a ways to go…and I would want people to understand our commitment to getting this [inflation fight] done.”

Powell acknowledged the concern that the Fed might get too far in front of market conditions, continuing to raise rates before fully assessing the impact of previous increases. But he also made it clear that in the effort to curb inflation without inducing a recession, he thinks inflation poses the greater long-term risk.

“If we were to over-tighten, we could then use our tools strongly to support the economy,” he told reporters. “Whereas if we don’t get inflation under control because we don’t tighten enough, now we’re in a situation where inflation will become entrenched. And the costs — the employment costs, in particular — will be much higher.”

Dents in the Housing Market

While higher interest rates haven’t yet done much to curb inflation, they have made a noticeable dent in the housing market, leading one business publication to report: “The housing market is worse than you think.” There are many reasons for that conclusion, among them:

Mortgage rates have topped 7 percent, their highest level since 2001, pushing average monthly mortgage payments for borrowers up by more than $1,000 according to the Mortgage Bankers Association (MBA), and pushing mortgage applications more than 40 percent lower than they were a year ago. Refinance applications were off by more than 85 percent, the MBA reported
Existing home sales have followed the same downward trajectory, declining for the eighth consecutive month in September. The 4.71 million annual sales rate the National Association of Realtors (NAR) reported for the month was more than 23 percent below the year-ago figure. Pending sales, reflecting contracts signed, declined for the fourth consecutive month, falling 31 percent below the September, 2021 pace. This NAR index is now at its lowest level since 2010.
New home sales also fell in September, confirming the cautions of analysts who had warned that the outsized increase reported for August was an aberration triggered by a short-lived dip in mortgage rates, and not an indication of underlying market strength. Single family home starts for the month were down by almost 20 percent year-over-year and building permits were off by 17 percent.

No Soft Landing for Housing

While economists are still debating the likelihood of a “soft landing” for the economy, one housing industry executive noted, “it is definitely a hard landing for housing. Any hope of a soft landing really evaporated last spring, when it became so clear that our customers who are accustomed to such low mortgage rates just were going to go on strike,” this executive told CNBC.

Home prices, which have soared by more than 45 percent nationally since the start of the pandemic, are also beginning to lose altitude. They’re not falling in absolute terms, but they are rising more slowly in most of the nation’s markets.

The closely watched Standard & Poors Core Logic Case Shiller index for July reported that prices have increased nearly 16 percent year-over-year. But the index also recorded its second consecutive month-over-month decline in August – the first back-to-back monthly declines for this index since 2012 ─suggesting to some analysts that a significant downward trend may be developing.

All the dismal headlines and all the articles about elevated home prices and rising interest rates knee-capping affordability and killing buyer demand, can obscure, to some extent, the fact that determined buyers remain in the market, benefiting from strong financial balance sheets, reduced competition, the ability to work remotely (and move to lower-priced markets), larger inventories and more leverage over sellers.

A Different Market

But there is no question that market conditions have changed – dramatically – in recent months. Days on market have increased, competitive bidding is rare (if not nonexistent) and sellers are having to work harder and offer more concessions to attract willing buyers.

“Buyers are still out there ad willing to buy when they find the right home at the right price,” Nicole Bachaud, a senior economist at Zillow, told DS News. “But sellers need to do things right to attract [their attention.] Buyers have some negotiating power,” she added, “and sellers are under pressure.”

The outlook for housing is concerning, though unclear, linked to the equally uncertain outlook for interest rates and the economy. If the Fed eases up on rates sooner than expected and the country avoids a recession (both outcomes currently deemed unlikely by most economists), the prospects for housing will brighten.

The reverse is also true, however. And whatever the future holds, the current housing picture is far from bright. Mark Zandi, chief economist for Moody’s Analytics, described it this way for the New York Times:

“Mortgage rates are sky high, prices are sky high, and there’s no inventory. This may be the worst time in my living history for the home buyer,” he added. “It just doesn’t make sense.”

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