Housing industry leaders: No more rate hikes

In the 1970s, a rampant inflation crisis gripped the nation, and it was only after the Federal Reserve took drastic measures that the situation was brought under control. The central bank's aggressive rate hikes, which pushed mortgage rates to a staggering 18% in 1981, led to a severe housing transaction—not price—downturn. During that turbulent period, some homebuilders resorted to an unusual form of protest by mailing lumber to then Fed Chair Paul Volcker, asserting that lumber was unnecessary for builders, given that spiked rates had priced out so many potential buyers.

Fast-forward to October 2023, and housing industry leaders are once again expressing their concerns to the Fed, but this time with a more measured tone.

On Monday, three prominent housing industry associations, the Mortgage Bankers Association (MBA), the National Association of REALTORS (NAR), and the National Association of Home Builders (NAHB), jointly addressed a letter to Federal Reserve Chair Jerome Powell. Their primary request: a halt to further interest rate hikes and a commitment not to divest Mortgage-Backed Securities (MBS) holdings until the housing finance market stabilizes.

The letter emphasized the impact of spiked interest rates—with the average 30-year fixed mortgage rate currently at 7.69%—on the U.S. housing market. These elevated rates have eroded housing affordability and have coincided with a significant reduction in mortgage origination and existing home sales. One need only glance at mortgage purchase applications, which have declined to levels last seen in 1996.

The letter signals the growing frustration in the housing industry, which has borne the brunt of the Fed's interest rate hikes.

The Fed's reasoning for slowing the housing market boils down to two words: Demand destruction. Historically, mortgage rates spike as soon as central banks go into inflation-fighting mode. That rate shock causes sales for both existing and new homes to fall. That causes demand for both commodities (like lumber) and durable goods (like windows) to fall. It also causes real estate and construction layoffs. Those economic contractions then spread throughout the rest of the economy and, in theory, help to weaken the labor market and tame runaway inflation.

The letter also highlighted the historically high spread between the 30-year fixed mortgage rate and the 10-year Treasury yield, indicating uncertainty about the Fed's future actions. If the spread normalized back to, say, a 1.75 percentage point spread, the average 30-year fixed mortgage rate would be at 5.94% today—rather than 7.69%.

Will these housing trade groups get their wish for no more rate hikes?

On Tuesday, Atlanta Federal Reserve Bank President Raphael Bostic told an audience that “I actually don't think we need to increase rates anymore” to get inflation back down to the Fed's 2% goal, however, he says if inflation were to begin to tick up again “we might have to increase [the Fed rate], but that's not my outlook right now, and that's not my expectation."

Thank you for subscribing to the free ResiClub newsletter!

Those who upgrade to the paid ResiClub Pro newsletter will get access to the “Lance Lambert Inventory Tracker” (it got delayed one day) in tomorrow’s first-ever ResiClub Pro premium article.