Hold onto your house-hunting hats, folks! The National Association of REALTORS®, along with the National Association of Home Builders and the Mortgage Bankers Association, just penned a stern letter to Fed Chairman Jerome Powell. They’re waving the red flag, warning that more rate hikes might just be a highway to Recessionville.
In case you missed the memo, mortgage rates recently skyrocketed to a 23-year high, camped out above 7% for weeks, and now there’s even chatter about them hitting the dreaded 8% mark. Yep, it’s a wild ride out there, and housing groups are stepping up to the plate to call out the Federal Reserve on its money mojo.
You see, they’re not too thrilled with the Fed’s rate dance, and they’ve got some solid points to make. According to these housing heavyweights, the Fed’s rate riddle is messing with mortgage rates, throwing the housing market into a rollercoaster of affordability woes and market mayhem. The cherry on top? All of this hullabaloo is happening while we’re already grappling with a massive shortage of affordable homes.
Now, get this, mortgage demand for home purchases is currently doing a disappearing act not seen since 1996! Freddie Mac, our trusty mortgage barometer, raised eyebrows last week when it announced the 30-year fixed-rate mortgage was strutting its stuff at a whopping 7.49%. Hold onto your hat, because some experts are even whispering that 8% rates could swagger in like a confident cat on the prowl. How soon? Well, it depends on how the investor mood swings.
So, why are these rates sky high? The secret sauce: They tend to shadow 10-year Treasury yields, but right now, the gap between rates and these 10-year yields is basically doing a limbo dance, setting historical records. The Fed, in its quest to curb inflation, has been hiking interest rates like it’s going out of style—11 hikes in the last year to be precise. They paused the rate-rising party back in September but slyly hinted that another one was lurking around the corner before the year wraps up. So, it’s no surprise that housing bigwigs are feeling a little queasy about it all.
The NAR, NAHB, and MBA want you to know that this mortgage-to-Treasury rate gap is digging a deeper hole in your pocket, costing you an extra $245 in monthly payments on a typical $300,000 mortgage. Ouch! But wait, there’s more. They’re waving the “recession” flag too, because they believe further rate hikes and this naggingly wide rate gap could play the role of the ultimate party pooper for our economy.
And speaking of parties, the real estate market is no small fry. It’s like the cool kid at school, making up a whopping 16% of the U.S. economy. So, the Fed needs to be like your favorite GPS, super transparent about where it’s steering this rate ship, to avoid a crash landing for housing.
Here’s the scoop: The Fed’s been hammering the point that they won’t stop with the rate hikes until the Consumer Price Index (CPI) reaches its magic number of 2% inflation. Powell, the Fed’s captain, mentioned that progress is being made on the inflation front but that “we need to see more.” In fact, 41% of real estate whizzes predict that inflation won’t play nice and stay at that 2% target until 2025. Yep, we’re in for a wild ride.
Now, why are rates still so high, you ask? Well, it turns out shelter costs are carrying the blame for keeping inflation in party mode. In July, shelter inflation was pegged as the ringleader behind 90% of the rise in consumer prices. The wise folks in the housing groups’ letter to Powell have a solution—building more affordable housing, of course! It’s the equivalent of a superhero swooping in to save the day, taming those pesky inflation beasts.
But the plot thickens. The economy has been putting on a brave face, despite these rate hikes. The latest job report reveals a staggering 4 million more job openings in the U.S. compared to pre-COVID days. But, here’s the kicker: Not everything’s sunshine and rainbows. NAR’s Chief Economist, Lawrence Yun, wants you to know that these interest rates are like the wrecking ball of doom for the economy. More sectors are teetering on the brink, and if the rate hikes continue, they might just be taking a nosedive. His solution? The Fed should tap the brakes on those rate hikes and maybe even consider a rate cut next year. That’s what they call a “soft landing,” and it sounds a whole lot better than the economic crash we’re all worried about. Buckle up, folks; it’s a bumpy ride on the rate rollercoaster!
