The Federal Reserve Faces Challenges as Housing Market Declines
- The housing market continues to weaken, with pending sales dropping 7.3% to an all-time low.
- Mortgage rates are projected to rise further from their current 7.43%, worsening affordability.
- In 2027, residential activity is expected to decline due to high borrowing costs and low inventory levels.
The Federal Reserve’s efforts to combat inflation are facing significant hurdles as the housing market experiences a downturn amidst ongoing price pressures. Recent housing data underscores this trend, indicating a further deterioration in September, complicating the Fed’s decision-making regarding interest rates.
Currently, mortgage rates stand at 7.43%, with predictions that short-term rates could increase in the coming months. Should this occur, the costs associated with home borrowing might rise even more, aggravating already tight affordability that has coincided with inflation and a housing shortage.
Chris Rupkey, chief economist at Fwdbonds, stated, “The housing market is about to go into a deep sleep unless Washington can do a 180 on its policies and make the cost of a new home more affordable.” He emphasized that while it is not yet winter, the housing market is entering a “deep freeze.”
The National Association of Realtors (NAR) reported that pending home sales—a key indicator measuring properties under contract but not yet sold—declined by 7.3% for the month, marking a staggering 11.3% drop year-over-year. This figure is the lowest on record since 2001, with the Wall Street projection having anticipated only a 0.4% decline.
In addition to pending sales, housing starts also fell drastically, reporting a 5.2% decrease compared to expectations of just a 0.4% decline. The Commerce Department’s data revealed a drop in building permits by 0.2%, contrary to the anticipated 2% increase, reflecting the challenging conditions facing the market.
Lawrence Yun, the NAR’s chief economist, noted that the fast increase in mortgage rates has weakened market conditions. He added, “Although job growth and income gains can support home purchases, housing affordability is more affected by changes in mortgage rates.”
Rising Rates Affect Market Predictions
The 30-year mortgage rate had been above 7% for most of September, closing the month at approximately 7.6%, a stark contrast to rates around 3% five years ago, which contributed to a surge in housing demand during the pandemic.
Home builder sentiment is at a 14-year low, reflecting the widespread unease in the market. Although a potential response from the Fed could include easing monetary policy to stimulate demand, the central bank is primarily focused on controlling inflation, which showed few signs of abating with wholesale final demand goods prices increasing by 2.6%. This is the fastest growth since 2009.
Goldman Sachs economist Ronnie Walker projected that the housing market would likely see further declines, stating, “In 2027, we expect the headwind from affordability—reignited by the recent rebound in mortgage rates—to increasingly dominate, weighing further on activity.” He noted that sustained high mortgage rates are anticipated to negatively affect housing turnover and existing home sales moving forward.
Continued Slowdown Expected
According to Goldman Sachs, over 95% of mortgage borrowers currently enjoy rates lower than the prevailing levels, with 65% at least 2 percentage points lower. The firm predicts residential investment will decline by 2.5%, 4%, and 1% in the next three quarters, with a steeper drop possible if rates do not decrease.
Single-family housing starts are projected to amount to just 875,000 in 2027, showing little change from the current year, while existing home sales are estimated at 3.9 million, approximately 26% below pre-COVID-19 levels. Walker attributes these stagnant levels to the “lock-in” effect, where current homeowners find it too costly to move and face higher borrowing costs amid declining affordability.
The market anticipates the Fed will maintain current benchmark rates during its next meeting. However, futures pricing indicates there is a strong likelihood of a quarter-point increase in December and another in March 2027, according to the CME Group’s FedWatch tool.
There is a glimmer of optimism from Yun, who suggests that the current trend of mortgage rates outpacing Fed hikes may indicate they are nearing their peak. “Given that mortgage rates have already risen much more than the Federal Reserve’s short-term interest rate hikes, mortgage rates could be topping out,” he noted, suggesting that both buyers and sellers could be waiting for favorable movements in rates before making decisions.
News Courtesy of CNBC
