Fed Chairman says ‘correction’ in housing prices would put market in better balance
Federal Reserve Chairman Jerome Powell said the U.S. housing market is likely to face a reset after a period of “incandescent” price rises that put homeownership out of reach for many Americans.
The average contract rate for a 30-year fixed-rate mortgage had already hit an all-time high of 6.25% last week at a level not seen since the Great Recession, the Mortgage Bankers Association (MBA) said.
The Fed Chairman spoke on housing prices after the central bank concluded its Federal Open Market Committee meeting on September 21, during which it raised interest rates another 75 basis points to combat high inflation.
August’s Consumer Price Index (CPI) showed a higher than expected inflation rate of 8.3%.
“There was a big imbalance…housing prices were rising to an unsustainable level,” Powell said.
“Longer term, what we need is for supply and demand to be better aligned so that house prices rise at a reasonable level, at a reasonable pace, and people can get back to living. pay for houses. We in the housing market probably have to go through a correction to get back to that spot,” the Fed Chairman said.
Frustration in the housing sector
Some market traders like Scott Maragioglio blamed the Fed for the current housing market price situation.
“Housing inflation rests squarely on the shoulders of the Fed,” he saidwarning “this is the stickiest form of inflation and can lead us into a wage-price spiral”.
Many players in the real estate market have been negatively affected by rate hikes this year, which have sent mortgage rates skyrocketing, worsening an already tight housing market.
“Fed Chairman Powell Says ‘The Housing Market Needs To Correct’ And Calls It ‘A Good Thing’. Please Remember The Buyers You Got Rates To Buy ever lower market launch rate!” complained Gaby Schkud, a real estate agent, on Twitter.
The Fed allowed massive amounts of credit and cheap money into the economy during the pandemic era to revive the flagging economy, which encouraged a housing boom.
“Fed Chairman Powell chose to inflate the housing bubble by using the Federal Reserve’s printing presses to buy up trillions of dollars in mortgages, hurting millions of families by driving up home prices. at record levels, said Joel Griffith, researcher at the Heritage Foundation.
Many analysts blame the Fed for not reacting to rising inflation in time, allowing the housing market to get too hot until it was too late.
“At least the Fed is helping the housing crash, right? There’s something for Jay Powell. “Monetary” policy doesn’t work, misinterpretation created the bubble in the first place,” said Jeffrey P. Snider, chief strategist at Atlas Financial, in a Publish criticism of Powell’s inflation-fighting strategy.
“Getting people to crowd there thinking they needed shelter from a currency crash that would never come.”
The benchmark rate is now 3-3.25%, the highest since 2008.
Fed policymakers have indicated they will continue to raise rates above current levels until inflation is hopefully brought under control when it reaches a “terminal rate” or end point of 4.6% in 2023.
“The Committee is firmly committed to bringing inflation back to its 2% target,” central bank officials said.
Since March, the Fed has raised interest rates from near zero to the most hawkish increases since it began using the overnight funds rate as its primary policy tool in 1990.
The last time central bank policy rates were this high was in 1994, when they hit 2.25 percentage points before rates were cut in July the following year.
Rate hikes are starting to have a gradual impact on the housing sector by slowing home sales, raising rents and pushing prices down slightly.
Powell noted that rents and other housing costs will remain high for some time, which could support inflation for some time, as they function as a major driver of consumer prices.
Housing costs, which are a measure of home prices known as owners’ equivalent rent, accounted for 25% of the headline inflation rate in August.
Several economists expect housing CPI inflation to eventually ease, as increases in rent rates for new leases appear to be slowing.
However, the Dallas Fed said in August that it expects a lag of up to a year and a half between when market rents begin to fall and when it finally shows up in the report on the CPI.
Mortgage rates and the housing market
Rising mortgage rates have put increasing pressure on the interest-rate-sensitive housing sector as the Fed continues its aggressive stance on rising borrowing costs.
The 30-year fixed-rate mortgage is the most popular home loan for homebuyers, but recent increases have deterred most first-time buyers from entering the market, leading to a major crisis.
Homeowners with adjustable rate mortgages have also been impacted by increases in borrowing rates, as their monthly payments increase each year as interest rates rise.
Meanwhile, the Fed’s tightening has led to a surge in Treasury yields since the start of this year, whose 10-year Treasury yield serves as a benchmark for mortgage rates.
Fed decisions tend to affect mortgage rates indirectly, by influencing the expectations of lenders and financial markets.
Stubbornly high inflation has led traders to believe that interest rates will be higher for the time being, as evidenced by the rise since early August.
The Fed also announced that it will keep its promise to reduce its holdings of mortgage-backed securities by about $35 billion per month, which will lead to even higher interest rates.
The Dow Jones fell 522.45 points after the Fed announced it would continue to raise interest rates.
It is still possible, if inflation is not brought under control, that the Fed may have to raise rates by a higher percentage at its next meeting in November.
“I bet we’ll have another bearish rally after the FOMC. The inflation report is skewed by the lagging cost of housing and housing is already crashing, the Fed knows that, 100 basis points off the chart, the risk diminishes, stocks surge Biden will pressure Powell to stabilize markets ahead of election,” Jimmy Ruska, founder of Ruska Solutions, said on Twitter.
The latest news from the Atlanta Fed suggests that US GDP will see zero growth for the third consecutive quarter this year.