Is the Housing Market in Recession in Because of Fed’s Decisions?

Right now, the big question on everyone's mind is whether our housing market has unofficially dipped into recession. Treasury Secretary Scott Bessent certainly thinks so, suggesting that the Federal Reserve's cautious approach to lowering interest rates is partly to blame. He voiced this opinion on CNN's “State of the Union,” and it’s a sentiment that’s stirring up a lot of debate. I believe that while parts of the economy are definitely feeling the pinch, calling the entire housing market a full-blown recession might be jumping the gun, but the warning signs are certainly there. A lot of folks are feeling the squeeze, and the Fed’s policies are definitely playing a role.

Is the Housing Market in Recession in Because of Fed’s Decisions?

What’s Causing the Housing Market Headache?

Secretary Bessent pointed directly at high mortgage rates as the culprit hindering the housing market. He believes that if the Federal Reserve were to lower interest rates, it would directly bring down those daunting mortgage rates. This, in turn, could help lift us out of what he's calling a “housing recession.” He also made an important point: it's often the low-income consumers who are hit the hardest. These individuals tend to have more debt and fewer assets, making them more vulnerable when economic conditions tighten.

Now, it’s important to understand that the Fed doesn't directly set mortgage rates. What they do control is the federal funds rate, which is a short-term rate banks use to borrow from each other. Mortgage rates, on the other hand, tend to follow the yields of longer-term bonds. These bond yields are influenced by what investors expect the Fed to do in the future and the general state of financial conditions. So, while the Fed's actions are a major factor, it's a bit more indirect than simply flipping a switch.

Fed’s Latest Move and Mixed Signals

Recently, the Federal Open Market Committee (FOMC) decided to lower their benchmark interest rate by a quarter of a point, bringing it down to a range of 3.75%-4%. Following this news, the average rate for a 30-year fixed mortgage did dip to a low of 6.17%, the lowest it's been in over a year. This sounds like good news, right?

However, Fed Chair Jerome Powell quickly tempered any excitement about further cuts. He made it clear that another reduction in December is “not a foregone conclusion,” emphasizing that the Fed's policy isn't on a fixed, predetermined path. This caution is drawing criticism.

Under Fire: The Fed's Tightrope Walk

The Treasury Secretary isn’t the only one questioning the Fed's approach. Fed Governor Stephen Miran, who voted for a larger half-point rate cut at the last meeting, warned in an interview with The New York Times that keeping interest rates too high for too long could actually push the economy into a recession. He basically said, “Why run that risk if inflation isn't a major concern?” This is a valid point.

Bessent echoed this sentiment, arguing that with the Trump administration focusing on reducing government spending, inflation should naturally be coming down. His logic is simple: if inflation is dropping, the Fed should be cutting rates to stimulate the economy, especially for sectors like housing.

The Fed’s Balancing Act: Dual Mandate

It’s crucial to remember the Fed's job is a balancing act. They have a “dual mandate” from Congress: to promote maximum employment and keep inflation close to 2%. They raise interest rates to cool down an overheating economy and fight inflation, and they lower rates to encourage job growth and boost economic activity. It’s a tough job, and sometimes when they're trying to tame inflation, they inevitably slow down other parts of the economy.

Realtor.com® senior economist Joel Berner also chimed in, noting that while a Fed rate cut can help mortgage rates fall, it doesn't always mean a direct, one-to-one drop in those long-term home loans. He mentioned that there’s a lot of uncertainty in the economy right now, which adds to the difference between the Fed’s target rate and what homebuyers actually pay.

When Data Becomes Scarce: The Government Shutdown’s Impact

Adding another layer of complexity, the recent government shutdown meant the Fed had to make crucial policy decisions without access to important economic data, like September’s employment numbers. This lack of timely information makes their job even harder and can lead to decisions that feel disconnected from the real-time economic situation.

We did get some inflation data, though. The Consumer Price Index (CPI) increased by 3% in September compared to the previous year. This was the sixth straight month of rising annual inflation. While 3% isn't sky-high, the trend of increasing inflation over several months gives the Fed pause, even if some critics feel they should be more aggressive in cutting rates.

Is the Housing Market Really in Recession?

So, let’s get back to that million-dollar question: is the housing market already in a recession? Joel Berner, from Realtor.com®, wouldn't go as far as to definitively say “yes” yet. However, he agrees that the market is showing signs of distress and could be heading that way.

Here’s what he pointed out:

• Home sales are slumping: Sales are on track to be the slowest full year since 1995! And even with mortgage rates falling recently, the number of sales hasn't picked up enough to make a significant difference.
• Builders are pulling back: Homebuilders, who were busy constructing a lot of lower-priced homes after the pandemic, are now seeming to slow down their output.
• Demand is weak: Buyers are struggling with affordability, and at the same time, the supply of homes is decreasing. It’s a double whammy.

What’s the Real Engine of the Housing Market?

Ultimately, the health of the housing market is directly tied to the job market. Berner highlighted that the job market has indeed softened recently. Things like tariffs and a general slowdown in business cycles are leading companies to hire less and lay off more workers. When people don't feel secure in their jobs, they're naturally hesitant to make a huge commitment like buying a new home. This lack of confidence in employment is a major driver of the current slowdown.

My take on this is that the Fed is caught in a difficult spot. They're trying to fight inflation without causing too much damage to the broader economy. But with the housing market showing such clear signs of weakness – falling sales, cautious builders, and affordability issues – it does feel like we’re in a precarious situation.

The debate over whether we're officially in a recession might be semantics for many homeowners and aspiring buyers who are already feeling the pinch. The Fed’s caution, while perhaps well-intentioned, is certainly under fire because many believe it’s prolonging the pain for key sectors like housing. We need to see more concrete signs of economic recovery, and a stronger labor market, for the housing market to truly bounce back.