The residential real estate industry is crying uncle on interest rate increases.
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With three weeks to go until the Federal Reserve's next Federal Open Market Committee meeting, a group of three trade groups sent a letter to Fed Chairman Jerome Powell Monday pleading for the end of raises to the federal benchmark rate, CNBC reports.
The National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association joined to “convey profound concern” that if the Fed continues to contemplate further rate hikes or begins actively selling off its mortgage portfolio, the housing market would crash, sending the entire economy into a “hard landing.”
After raising the federal funds rate 11 times since March 2022, the FOMC held steady at its Sept. 19-20 meeting, keeping it in the range of 5.25% to 5.5%. But a majority of committee members projected at least one more rate hike between the Oct. 31-Nov. 1 meeting and the Dec. 12-13 meeting, leading to broad concern that interest rates will be higher for longer than markets expected even six months ago.
Though multifamily deliveries are at a multidecade high, new residential construction starts were down 14.8% from January to August this year compared to the first eight months of last year, according to Census Bureau data. Even more concerning for the trio of trade groups, mortgage rates are at a 23-year-high, according to MBA's weekly mortgage applications survey. Mortgage applications sank to a 27-year low.
Uncertainty about how high the Fed will push interest rates and how long rates will be elevated has paralyzed real estate financing, making the cost of a mortgage a bigger barrier to homeownership than the raw price of homes, the trade groups said in the letter to Powell.
“The uncertainty-induced mortgage-to-Treasury spread is costing today’s homebuyers an extra $245 in monthly payment on a standard $300,000 mortgage,” the letter says. “Further rate increases and a persistently wide spread pose broader risks to economic growth, heightening the likelihood and magnitude of a recession.”
Although Powell has maintained that the FOMC will do what is necessary to rein in inflation, the cost of shelter now makes up more than 90% of the overall inflation rate.
NAR, NAHB and MBA also pointed out in the letter that shelter costs rose 7.3% in August compared to 3.7% growth in consumer prices, laying the blame for the rise in costs at the feet of the Fed for creating an uncertain environment.
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