Strong household balance sheets could stave off a U.S. recession if mortgage rates have peaked, a Freddie Mac economist says.
U.S. mortgage rates look like they have already peaked and home prices are not likely to fall on a national basis, boosting the chances the broader economy will dodge recession, Freddie Mac deputy chief economist Len Kiefer told MNI.
The rate on 30-year fixed mortgages has surged more than 2 percentage points to around 5.5% since the start of the year, as the Fed signaled increasing concern over 40-year high inflation and its resolve to keep raising interest rates until those pressures subside convincingly.
“That is a pretty big movement for the market to digest,” Kiefer said in an interview, adding that if the mortgage market has already digested the Fed’s policy stance, strong consumer balance sheets could stave off a recession, even if the risks of a downturn have risen. “A lot of the rate increases that may come from the Fed have already been anticipated.”
Kiefer expects home price gains to ease from the Covid housing boom levels of 18% in 2021 to 12.8% this year and 4% in 2023, while total home sales, which are down 17% this year, slow to 6 million in 2022 and 5.4 million in 2023, having peaked at 6.9 million in 2021.
“If inflation does moderate into the late part of this year and early part of next year and rates stabilize, then it’s well possible we may avoid a recession over the next year and a half,” Kiefer said. “The risks are higher than they were a year ago but I still think it’s somewhere around a coin flip.”
He added that it will take time for some of the softness in price appreciation to start showing up because of the backward-looking nature of the data.
“House price data is measuring home sales that were closed maybe a month ago and maybe they were actually rate-locked three-months ago. When will it show up in terms of price? Probably around spring,” he said.
The Fed has raised interest rates three times this year, moving at an aggressive pace to bring the fed funds rate target range to 1.50 to 1.75%. It is widely expected to deliver another 75-basis-point increase at tomorrow’s rate decision. (See MNI: CPI Shortens Odds Of 75BP Hike In Sept.-Ex-Fed Staffers)
SOURCE OF STRENGTH
Because prices are unlikely to fall nationally, housing will remain a tailwind for consumption, Kiefer said.
“Our forecast is for prices not to fall. In that world, at least on a nominal basis, households are actually seeing their housing equity increase. It may not be keeping pace with inflation but their debt is also not keeping pace with inflation. In that case, housing is still a source of positive wealth, it’s not subtracting from consumption but actually adding to it,” he said.
Kiefer said employment in mortgage financing was already taking a hard hit but added that construction is still grappling with labor shortages that are unlikely to be resolved any time soon.
“With originations – loan officers and the like, they move with the market. When the market contracts that leads to layoffs, and you’re definitely seeing that among many banks and lenders,” he said.
“On the construction side talking to homebuilders they’re facing a real deep challenge, it’s not just immediate, it's longer-term because they have an aging workforce and they have not been able to replenish it.”