Eye on the Economy Tightened Monetary Policy Harming Housing Affordability

TIGHTENED MONETARY POLICY Harming Housing Affordability

The Federal Reserve’s monetary policy committee increased the target for the short-term federal funds rate by 50 basis points, increasing that benchmark to a top-end of 1% for the first time since February 2020. Additionally, the Fed announced plans to reduce its balance sheet, which as a part of quantitative easing increased substantially to include $2.7 trillion of U.S. Treasury securities and mortgage-backed securities. The Fed will begin rolling off mortgage-backed securities on a partial basis beginning in June, ultimately reaching a monthly cap of $35 billion in September. The combination of these changes is partially reflected in current interest rate conditions, with the 10-year Treasury rate near 3% and the average 30-year fixed-rate mortgage above 5%. Nonetheless, rates will continue to move higher.

The more hawkish stance for monetary policy is intended to tame inflation, which is near a 40-year high. It is likely that the peak pace of inflation has now passed; however, future readings will remain elevated over recent norms. Moreover, the economy is showing clear signs of slowing, with first quarter GDP growth registering a surprising -1.4% annualized rate of decline. This indicates the economy has nearly stalled and is at risk of stagflation, a combination of low growth and elevated inflation last experienced in the 1970s.

Rising rates have taken a toll on housing affordability. Indeed, in the first quarter of 2022, those who indicated they could afford fewer than half of homes available for sale in their market made up 81% of buyers — the highest share since the pandemic. Overall buyer conditions have fallen back to 2018 levels, the last period of Fed tightening.

Declines for affordability are affecting sales data. For the first quarter, the FHA-backed mortgage share of the market fell to a 15-year low, a sign of declining demand for first-time buyers. New single-family home sales in March declined to an annual rate of 763,000, 12.6% lower on a year-over-year basis. Because of rapidly rising construction costs, median new home prices are up more than 21% year over year. Inventory is rising as well due to lean resale supply. New home inventory has increased 35.8% year over year, although much of that gain is for homes that have not yet completed construction.

The homeownership rate was steady at 65.4% in the first quarter of 2022. However, given the challenges with affordability, we are likely to see some softening of this rate in the quarters ahead. Given that housing is 16.7% of GDP, this is a rising concern for a macroeconomy facing a growing series of challenges.

BY: NAHB CHIEF ECONOMIST ROBERT DIETZ