Eye on the Economy Fed Raises Rates Again, Puts more Pressure on Housing

FED RAISES RATES AGAIN,

Puts More Pressure on Housing

Continuing its aggressive strategy to bring the rate of inflation lower, the Federal Reserve’s monetary policy committee raised the federal funds target rate by 75 basis points, increasing that target to an upper bound of 3.25%. This marks the third consecutive meeting with an increase of 75 basis points. And the Fed’s leadership has signaled they intend to preserve these elevated rates for a substantial period of time — well into 2024 — placing added pressure on the housing industry.

Indeed, the central bank expects the target for the federal funds rate will increase by 75 more basis points in November, 50 in December, and then conclude with 25 points at the start of 2023. These increases would ultimately push the federal funds top rate to near 4.8% and, in turn, raise mortgage rates higher still. For example, the average 30-year fixed mortgage rate will likely surpass 6.5% before the end of this year.

The current monetary policy path all but guarantees a mild recession, along with a notable rise in the unemployment rate. In fact, the Fed is risking an overshoot given the lagging contributors of inflation, such as rent, which will show gains in the data several months after the actual economy has stalled. The Fed’s current path is thus overly hawkish, particularly given the previous two quarters of declining GDP.

Housing data continue to show the negative impacts of higher interest rates. Builder confidence in the market for newly built single-family homes fell three points in September to 46 — the lowest level since May 2014 (apart from the spring of 2020) according to the NAHB/Wells Fargo Housing Market Index (HMI). This was the ninth straight monthly decline for the HMI, which also projects ongoing declines for the volume of singlefamily housing starts in the months ahead. Additionally, 24% of builders reported reducing home prices, up from 19% last month.

BY: ROBERT DIETZ

Housing starts posted a gain in August but permits continued a downward trend that will likely prevail into next year. NAHB is forecasting 2022 to be the first year since 2011 to record an annual decline in single-family home building. In contrast, the number of multifamily 5+ units currently under construction is up 26.5% from a year ago. The current total of 890,000 multifamily units under construction is the largest since 1974.

Despite a slight improvement because of recent declines in energy prices, the annual rate of inflation remains above 8% for the sixth straight month. The Fed remains intent on bringing inflation back to a 2% target rate, regardless of the recession risks. This outlook reinforces the fact that fiscal and regulatory policy have failed to address many of the root causes of today’s elevated inflation: too much stimulus and not enough effective policy to address supply chains and costly regulations. The Fed itself is projecting interest rate declines in 2024, when a housing rebound will likely take hold.