The U.S. housing market has experienced a slowdown in activity this year due to tighter supply, according to Thomas Barkin, the president of the Federal Reserve Bank of Richmond.
Speaking at a Real Estate Roundtable event in Washington, D.C., Mr. Barkin explained that home prices have remained strong despite higher interest rates and slowing sales volumes.
But the industry has been longing for lower rates, he noted.
“You may know that the last time the Fed tackled high inflation, in the ’80s, homebuilders sent Paul Volcker two-by-fours inscribed with the message: Lower interest rates,” he said.
In a letter to Fed Chair Jerome Powell by the National Association of Home Builders, the Mortgage Bankers Association, and the National Association of Realtors, the central bank was urged not to pull the trigger on more rate hikes.
“Further rate increases and a persistently wide spread pose broader risks to economic growth, heightening the likelihood and magnitude of a recession,” the letter stated.
A treasure trove of data and research shows that further Fed tightening could worsen current conditions in the real estate sector, particularly in terms of affordability.
Housing Affordability Challenges
With supply failing to meet demand and mortgage rates approaching 8 percent, housing affordability reached a new all-time low in August, according to industry data.
The NAR Housing Affordability Index dropped to 91.7 in August, the lowest reading since 1989, indicating that a household with a median income does not earn enough to qualify for a mortgage on a median-priced home.
NAR figures revealed that in August, the typical family needed to earn $107,232 to qualify for a mortgage with a 20 percent downpayment. Additionally, the average family spent over one-quarter (27 percent) of their income on annual mortgage payments.
Housing inventories have worsened over the past year, with existing home sales declining in 13 of the last 15 months, including a 0.7 percent drop in August.
The challenge facing the U.S. real estate market today is the lack of homes available for sale.
When the Federal Reserve slashed interest rates to near-zero during the coronavirus pandemic, mortgage rates reached record lows.
Home prices have also surged since the public health crisis, rising nearly 30 percent to a median sales price of $416,100.
A “for sale” sign hangs in front of a home in Miami, Fla., on June 21, 2022. (Joe Raedle/Getty Images)
The combination of high mortgages and prices has made it difficult for the new generation of homebuyers to achieve the American dream of homeownership. However, those who purchased a home before the Fed’s quantitative tightening cycle began are in a good position, with mortgage rates of 2 to 4 percent and properties that have gained significant equity.
A recent analysis by Redfin revealed that 92 percent of homeowners have a mortgage rate below 6 percent, providing little incentive to sell and move to a home with a higher rate. Nearly one-quarter (24 percent) have a rate below 3 percent, close to a record high achieved in the first quarter of 2022.
Ultimately, the housing market could be divided into two groups: those benefiting from low mortgage rates and accumulated equity, and those struggling with affordability.
Andy Walden, the ICE vice president of enterprise research, warned that incomes would need to increase by 55 percent or home prices would have to drop by 35 percent to restore affordability.
“Those are massive movements we’re talking about, and none of them are going to happen in a vacuum, and none of those single factors are going to make the move,” Mr. Walden told CNBC earlier this month.
Mortgage Rates Now and Beyond
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) found that builder confidence in the real estate market for newly constructed single-family homes declined for the third consecutive month in October. Higher interest rates have priced out some buyers, including younger families, leading to lower levels of buyer traffic, according to NAHB Chairman Alicia Huey.
“Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability,” Ms. Huey added.
A construction worker carries materials as he works on a home under construction at a housing development in Petaluma, Calif., on March 23, 2022. (Justin Sullivan/Getty Images)
NAHB Chief Economist Robert Dietz emphasized that increasing housing production is crucial to solving the housing affordability crisis.
“Boosting housing production would help reduce the shelter inflation component that was responsible for more than half of the overall Consumer Price Index increase in September and aid the Fed’s mission to bring inflation back down to 2%,” he said. “However, uncertainty regarding monetary policy is contributing to affordability challenges in the market.”
The September consumer price index (CPI) shelter index is up 7.2 percent compared to a year ago.
While the futures market predicts that the Fed will keep rates unchanged at the upcoming policy meetings, the central bank’s Summary of Economic Projections suggests one more rate hike this year.
In addition, Treasury yields have been rising, with the 2-, 10-, and 30-year yields reaching their highest levels in 16 years. The volatility in the bond market has had a significant impact on the housing market, as mortgage rates are closely tied to Treasury bond rates.
Fannie Mae projects that mortgage rates will remain in the 7 percent range for most of next year before declining to 6.7 percent by the end of 2024.
“In many ways, the housing market experienced four years of business in a two-year period between mid-2020 and mid-2022,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “With ongoing affordability constraints and rising mortgage rates, much of that activity has essentially been given back. We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024.”
The FOMC will hold its next two-day policy meeting on Oct. 31 and Nov. 1.
Why are the National Association of Home Builders and other industry associations urging the Fed not to pursue further rate hikes?
Ccording to Thomas Barkin, the president of the Federal Reserve Bank of Richmond, the U.S. housing market has experienced a slowdown in activity this year due to tighter supply. Despite higher interest rates and slowing sales volumes, home prices have remained strong. However, the industry has been hoping for lower rates.
In a letter to Fed Chair Jerome Powell by the National Association of Home Builders, the Mortgage Bankers Association, and the National Association of Realtors, the central bank was urged not to pursue further rate hikes. The letter stated that further rate increases and a persistently wide spread pose broader risks to economic growth, increasing the likelihood and magnitude of a recession.
A wealth of data and research indicates that further tightening by the Fed could worsen current conditions in the real estate sector, particularly in terms of affordability.
Housing affordability has become a significant challenge, as supply falls short of demand and mortgage rates approach 8 percent. Industry data shows that housing affordability reached a new all-time low in August. The NAR Housing Affordability Index dropped to 91.7, its lowest reading since 1989. This signifies that a household with a median income does not earn enough to qualify for a mortgage on a median-priced home.
The slowdown in the U.S. housing market and the decline in affordability highlight the need for policymakers to address these challenges. As the industry waits for lower interest rates, it is crucial for the central bank to consider the potential ramifications of further rate hikes. Balancing economic growth with affordability should be a priority to ensure a sustainable and stable housing market.
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