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

 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.

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Russia’s invasion of Ukraine has unleashed an immigration tsunami, as millions of Ukrainian refugees have sought safety in Poland and other neighboring countries. 

The conflict has also roiled financial markets, sent oil prices soaring with unprecedented speed and reshaped geo-political maps.  But it has not, as , deterred the Federal Reserve’s plan to boost interest rates in order to curb rising inflationary pressures.   

Testifying before the House Financial Services Committee, Powell acknowledged that the invasion is “a game changer” that will have unpredictable and probably long-lasting impacts on the U.S. economy.  “we don’t know what the real effect[s] …will be,” he said.

But the need to combat inflation  - currently running at close to a four-decade-high -- is clear, he stated, explaining his intention to support a 25 basis point rate increase when the Federal Open Market Committee meets March 15-16. 

Future, and possibly more aggressive rate hikes may be needed, he cautioned.  If inflation doesn’t begin to ebb, as Fed economists expect, or if it remains “persistently high,” Powell said, “we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”

“The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Powell said. “Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.”

Jobs and Housing

Before Russia attacked Ukraine, some economists were speculating that a weak February employment report, which many expected, might persuade the Fed to delay its anti-inflation rate hike plan.  But the employment numbers were far better than even the optimists had expected.  Employers added 678,000 jobs, beating expectations for the second consecutive month.  The unemployment rate fell to 3.8 percent. 

The housing market, too, continues to exceed expectations and defy financial headwinds created by rising mortgage rates, rising prices, and shrinking inventories. Existing home sales in January increased by 6.7 percent compared with the December pace, almost, but not quite, equaling the year-ago performance. 

Lawrence Yun, chief economist for the National Association of Realtors (NAR) said concern that mortgage rates would continue to rise pushed many reluctant buyers to enter the market.  They found listings scarce and competition for available homes intense.

Both the number of homes available for sale and their time on market fell to all-time lows, according to the NAR, which reported a total of 860,000 listings in January, down  almost 17 percent compared with January 2021. Nearly 80 percent of the homes sold in January were on the market for less than a month, according to the NAR.

 

Bidding Wars and Rising Prices

Redfin reported 30 percent fewer listings in February compared with the same month last year, with almost 70 percent of the company’s listings triggering bidding wars.  Boston was on the list of the top 10 markets reporting the steepest increase in bidding wars – 74.8 percent of homes sold in January compared with 66.7 percent in December of last year. 

Following the law of supply and demand, increasing competition for a shrinking supply of homes pushed prices higher.  The NAR’s median home listing  price increased by almost 13 percent year-over-year, reaching a record high of $392,000 on February.

The median price of  single-family homes sold in January was $350,000 – a 15.9 percent increase over the year-ago median and the 119th consecutive year-over-year gain the NAR has reported.  Condo prices were up by almost 11 percent in January, , reaching a median of almost $300,000. Zillow reports that there are now 481 cities in which average home prices exceed $1 million, with 146 cities joining that list last year. 

Although sustained demand has fueled strong sales has  continued to fuel strong sales this year, pending sales declined in January for the third consecutive months falling almost 10 percent below the year-ago level.

“Given the situation in the market—mortgages, home costs and inventory—it would not be surprising to see a retreat in housing demand,” the NAR’s  Yun said. He predicts that market conditions will be “volatile” this year, as rising mortgage rates create affordability challenges, especially for first-time buyers, who are already struggling.  They accounted for only  percent of January sales this year, according to the NAR, compared with 30 percent in December and 33 percent a year ago.

The National Association of Home Builders (NAHB) estimates that 69 percent of American households today can’t qualify for the mortgage they would need to purchase a median-priced new home.  The NAHB’s “priced out” estimate is based on a new home price of $412,506 and a mortgage rate of 3.50 percent – both variables higher now than when the study was done last year.