In the face of housing market challenges, urgent calls for the Fed to halt rate increases to stabilize the economy. The Housing Market Will Drag the Economy into a Hard Landing Unless the Fed Takes These ‘Simple Steps,' Trade Groups Warn.
Housing trade groups have urgently called on the Federal Reserve to cease immediate interest rate hikes, stressing the necessity of two critical “simple steps” to avert a looming hard landing that could thrust the economy into a recession.
Warning of Broader Risks
The National Association of Home Builders (NAHB), the Mortgage Bankers Association (MBA), and the National Association of Realtors (NAR) have sounded a warning that more rate hikes could significantly heighten the probability and impact of a recession, posing substantial risks to economic growth. This concern is exacerbated by the historic spread between 30-year mortgage rates and the 10-year Treasury yield, reflecting deep-seated uncertainty regarding the Federal Reserve's future direction.
Housing's Weight on the Economy
The housing industry is a significant pillar of the US economy, accounting for an estimated 16% of GDP. A sudden slowdown in new and existing home sales could potentially trigger a broader economic downturn if a sales rebound does not materialize swiftly. The housing market's health is intertwined with the nation's economic stability.
The Urgency of Two ‘Simple Steps'
To navigate this delicate situation, the trade groups implore the Federal Reserve to make two explicit statements:
- “The Fed does not contemplate further rate hikes;”
- “The Fed will not sell off any of its mortgage-backed securities holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized.”
The Fed's ongoing quantitative tightening, with a reduction of its balance sheet by about $1 trillion since March 2022, emphasizes the urgency of clarity in the Fed's actions and plans. These steps would provide much-needed certainty to the market about the Fed's rate path and its MBS portfolio plans, consequently reducing volatility for traders and investors.
A Call for Market Certainty and Stability
Implementing these two steps could not only enhance home builder sentiment but also stimulate a fresh supply of homes to the market. A surge in home supply would contribute to mitigating inflationary shelter costs, a significant driver of the recent increase in inflation. By doing so, the housing sector can avoid precipitating the hard landing that the Federal Reserve has been diligently striving to prevent.
The ball is now in the Federal Reserve's court to heed the warnings from housing industry trade groups. The fate of the housing market and its impact on the broader economy hinges on these ‘simple steps' and the resolve of the Fed to navigate this precarious situation with prudence and foresight.