MNI: Fed Welcomes Softening In Hot Housing Market-Ex-Officials

The American housing market's sharp turn in recent weeks is a sign of successful Federal Reserve interest rate guidance so far, former policymakers told MNI, with realtors expecting a steady deceleration in home price increases into 2023.

While the Fed has hiked by a single quarter-point so far, its words signaling a coming rapid adjustment propelled the average 30-year fixed mortgage rate to 5.10% this week from 3.11% in December, the fastest climb since the early 1980s. Existing and new home sales slid by 2.7% and 8.6%, respectively, even as Census Bureau data showed that, while completions slipped, housing permits and starts continued to move up in March.

“They’d like to see demand dialed back and supply dialed up and then see where they are, take some pressure off of prices,” said Donald Kohn, former Fed vice chair, in an interview. “It’ll be a more difficult read than usual because, like the rest of the economy, there will be supply and demand issues that need to be interpreted.”

Housing is one of the first places the Fed looks to see if policy adjustments are working as hoped. While home sales have adjusted, it may take longer to see an effect on prices, which soared 19.8% in the year to February, according to the S&P CoreLogic Case-Shiller index.

"The consensus is that there is a housing shortage in this country and so prices will continue to move up, but the question is how the Fed's hikes will bite on new construction over time," said Gary Stern, who led the Minneapolis Fed for over two decades. Referring to the Fed’s view of the market reaction so far, he said: “I think they'd be pleased.”

PERSISTENT PRICE GROWTH

Housing market sources echoed the sentiment that low supply means prices are not likely to fall soon. Nadia Evangelou, director of forecasting at the National Association of Realtors, expects around 5.6 million homes to be sold in 2022, a 5% increase from 2019, with the rate of price rises easing to 5% by yearend, before falling to about 3% in 2023.

"We expect the 30-year fixed mortgage rates to average 5% for 2022, with rates reaching 6% by the end of the end of June," she said, adding that higher rates for all-cash offers, which made up 28% of transactions in March, should continue.

While emphasizing uncertainty, Evangelou said home prices are unlikely to decline even if the Fed has to push the fed funds rate above neutral levels.

"I don't expect to see that drop because we have a severe housing shortage. If we didn't have a severe shortage going back a decade and the millennial generation coming of age, then, yes, that would be the effect that we would usually have," she said. (See MNI INTERVIEW: Rates May Have To Exceed Neutral-Fed's Giannoni)