The Federal Reserve’s aggressive interest-rate hikes are sending shockwaves through the housing market, raising concerns of a potential recession reminiscent of the 1980s.
In a recent warning, Wells Fargo has highlighted the risks associated with the central bank’s commitment to keeping borrowing costs elevated until at least 2024 as part of its strategy to combat inflation.
This prolonged period of high interest rates is likely to impact construction and housing activity, creating a challenging environment for both buyers and sellers.
Economists Charlie Dougherty and Patrick Barley, in a recent research note, noted that the residential sector had been showing signs of improvement in the first half of 2023.
However, the recent surge in mortgage rates has reversed this trend, leading to a contraction in the housing market.
They cautioned, “Although mortgage rates may gradually descend once the Federal Reserve begins to ease monetary policy, financing costs are likely to remain elevated relative to recent norms.”
This “higher for longer” interest rate environment threatens to curb both demand and supply in the housing market.
One of the most visible impacts of rising interest rates is the surge in mortgage rates.
The average 30-year fixed-rate mortgage has surged from below 4% to just shy of 8% since the Fed initiated its tightening cycle in March 2022, according to data from Freddie Mac.
This steep increase in borrowing costs has deterred prospective homebuyers and curtailed new housing construction, further tightening an already supply-constrained market.
It has also prompted many existing homeowners to hold onto their homes, as they are reluctant to give up historically low mortgage rates secured in the past. As a result, the rate of home sales in the first half of 2023 stands at just 1%, as reported by Redfin.
The housing market’s current struggles echo the 1980s, when the Federal Reserve implemented an aggressive campaign to combat inflation. This drive led to 30-year mortgage rates soaring to an astonishing 19%.
Homebuilders, in a desperate plea, sent lumber to then-Fed Chair Paul Volcker with the message: “Help! Help! We Need You. Please Lower Interest Rates.”
This plea from the 1980s mirrors the letter recently sent to the Fed’s board of governors by the National Association of Realtors, Mortgage Bankers Association, and National Association of Homebuilders.
These industry groups sought to convey the urgent need for a change in the central bank’s current rate-hiking stance, highlighting the severe impact that higher interest rates can have on the residential sector.
As 2023 unfolds, almost every facet of housing activity has shown signs of regression.
The combination of the Federal Reserve’s tight monetary policy and mortgage rates breaching 7% has led to declining home sales, reduced mortgage applications, and a drop in indices tracking homebuilder confidence.
The housing market’s vulnerability to these challenges underscores the need for a balanced and thoughtful approach from the Federal Reserve.
In conclusion, the Federal Reserve’s aggressive interest-rate hikes are undoubtedly sending shockwaves through the housing market.
The parallels with the 1980s are evident, as rising mortgage rates and a constrained supply of homes threaten to trigger a housing-market recession.
As stakeholders in the housing industry plea for assistance, the Fed faces a crucial decision on whether to continue its current policy course or adjust to address the concerns of a market facing significant headwinds.
The housing market, a crucial driver of economic activity, is at a crossroads, and the decisions made in the coming months will have far-reaching consequences.