Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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The nation’s red hot labor market cooled a bit in August, indicating that the Federal Reserve’s inflation-fighting efforts may be having the desired effect.  But Fed officials aren’t declaring victory yet. 

Far from it.  Speaking at the Fed’s annual Jackson Hole conference, Chairman Jerome Powell said policy makers are willing to accept higher unemployment and slower  economic growth in the near term in order to avoid the long term damage uncontrolled inflation would cause.

“With inflation [still] running far above two percent and the labor market extremely tight, estimates of longer run neutral {Fed policy] are not a place to stop or pause,” Powell said, adding, “we must keep at it until the job is done.”

Employers added 315,000 workers to their payrolls in August, well below the 526,000 increase in July, but still strong enough, most analysts believe, to keep the Fed’s foot firmly pressed on the inflation brakes.  The August report “was a step in the right direction,” Brian Jacobsen, senior investment strategist at Allspring Global Investment told Reuters.  “But it wasn’t a giant leap in that direction.”   

The Fed’s Federal Open Market Committee is widely expected to approve another 75 basis point increase in the benchmark Fed Funds rate at its next meeting, as it  tries to thread a narrow monetary policy needle that will tame inflation pressures without pushing the economy into a recession.

Housing Sagging

While employment growth remains strong, if less robust, than it has been, the housing market is sagging under the combined weight of higher mortgage rates and rising prices that have driven housing affordability to the lowest level in four decades, according to the Mortgage Bankers Association.

A ”Housing Opportunity Index” created by the National Association of Home Builders (NAHB) classified 42.8 percent of  the new and existing homes sold between April and June of this year as affordable to families earning the national median income of $90,000, down from 56.9 percent in the first quarter.

Current housing market reports are replete with indications that the market is slowing:

  • Existing home declined for the sixth consecutive month in July. Pending sales, an indicator of future existing home transactions have declined in eight of the past 10 months, and were almost 20 percent below the year-ago level in July.
  • New home sales also continued their downward trend in July, falling for the fourth consecutive month, leaving them 20 percent below the year-ago level.
  • Housing starts, permits for new construction and builder confidence are all falling. Builder confidence, measured by a NAHB index, slipped into negative territory (below 50) in August for the first time in more than two years.
  • Although home prices are still rising, the rate of increase has slowed.
  • More buyers are backing out of contracts to purchase both new and existing homes. Cancellation rates on new homes have more than doubled since April, according to John Burns Real Estate Consulting. Redfin reports that 16 percent of the deals on existing homes that its agents in July fell through.
  • Buyers and sellers are becoming more wary. New listings are declining (August listings were 13.4 percent lower in August compared with the same month last year levels, according to and fewer buyers are chasing available homes.  Redfin reports that 44.3 percent of homes listed by their agents drew competing bids in July compared with 63.8 percent a year ago.  “Too many buyers chasing after too few properties — those days are over,” Lawrence Yun, chief economist for the National Association of Realtors, noted in a recent commentary.. “Sellers need to be realistic about the changing market,” he added.. “They cannot expect to simply list their home at a high price and easily find a buyer.”
  • More sellers are cutting their asking prices ─ 31 percent of them did so in August, according to a survey.
  • Sellers, who have been dictating transaction terms in a hot market, are negotiating them as the market cools. A survey found that 92 percent of the owners who sold their homes in the past year accepted some “buyer friendly” terms.

Downturn, Rebalancing or Recession?

Some analysts interpret these negative indicators as evidence that an overheated housing market is regaining its balance; others see signs of a declining market that has not yet reached its floor; a few are using the ‘R’ (recession) word to describe what they see.  Robert Dietz, chief economist for the NAHB, is in the latter category.

“I think we’re in a housing recession right now,” he concluded in a recent commentary. “After a year and a half of post-Covid housing strength, this isn’t just a retrenchment to a more normalized trend — this is definitely a weakening.”

Goldman Sachs analysts aren’t calling this a housing recession, but they agree that the market “has further to fall.”  They expect home price growth to “slow sharply” through the end of this year, and then flatline in 2023.

Economist Douglas Holtz-Eakin, president of the conservative American Action Forum, also sees the housing outlook in largely negative terms,  “It won’t be pretty,” he warned during recent testimony before the Senate Banking Committee.  “Housing is going to be disproportionately bearing the brunt of this disinflation, and the next couple of years are going to be tough,” he told reporters

Nicole Bachaud, senior economist at Zillow, prefers to talk about a market that is “rebalancing” rather than declining.  As prices “level off,” she told U.S. News and World Report, power is “slowly transitioning back into the hands of buyers who can afford to stick around.  But the market is still a long way off from finding a sweet spot,” she acknowledged. 

Daryl Fairweather, chief economist for Redfin, thinks the market is going to rebound, “probably sometime next year,” but he also said he’s “not sure how positive a turnaround it will be.” 

It wasn’t that long ago analysts were worrying that the housing market was in danger of overheating.  That clearly is no longer a concern.