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Housing economists beg the Fed not to raise rates

Housing economists are urging the Federal Reserve to hold back on raising rates, worried that elevated borrowing costs—that have gone up since the central bank began its hiking cycle in March 2022—have pushed mortgage rates too high and made homes unaffordable for many Americans.

Sales of homes dropped 2 percent in September to a little under 4 million, the lowest such level for more than a decade. The decline, which was a 15 percent plunge compared to a year ago, according to the National Association of Realtors (NAR), was the latest evidence that expensive mortgages are dissuading potential buyers from purchasing homes.

Housing experts are imploring the Fed to pause any more rate hikes to help stop the struggles that the sector is facing.

“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” NAR Chief Economist Lawrence Yun said in a statement shared with Newsweek. “The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.”

A small number of homes available for sale coupled with high interest rates led to a nearly 3 percent jump in prices from a year ago to an average of $394,000 per home, NAR said, the third straight month of price increases.

Pedestrians are reflected in a window as they walk by a sign displaying mortgage rates inside a Bank of America office on June 7, 2012, in San Francisco, California. Mortgage rates have hit 8 percent in October 2023, worrying housing economists.
JUSTIN SULLIVAN/GETTY IMAGES

Policymakers from the central bank have been keen to emphasize that they want to maintain a monetary policy environment that will bring inflation down to its 2 percent target. This could mean a longer environment of high interest rates, currently at a two-decade high range of 5.25 to 5.5.

But the NAR, the Mortgage Bankers Association (MBA), National and National Association of Home Builders last week wrote to the Fed’s Board of Governors to “convey profound concern” over the central bank’s approach to rates. They suggested that further rate increases could add to broader risks to economic growth, heightening the likelihood and magnitude of a recession.

They urged the Fed to make clear that it won’t “contemplate further rate hikes.”

Mortgage rates for the popular 30-year fixed-rate loan hit 8 percent this week, the highest it’s been since the turn of the century. Analysts point out that elevated rates will continue to put pressure on home sales.

“A resurgence of mortgage rates is likely to contribute a further decline in existing home sales in the months ahead,” Fan-Yu Kuo, an economist at NAHB, said in an analysis on Thursday shared with Newsweek.

The housing market makes up nearly 16 percent of U.S. economic activity, according to NAHB estimates. The NAR, MBA and NAHB suggested that if the Fed paused on rates, it could give the sector relief from its current headwinds.

“We urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid,” they said.

For 2023, economists anticipated home sales to stay low.

“We expect existing homes sales to come under more pressure over the balance of 2023 as higher mortgage rates price more buyers out of the market,” Nancy Vanden Houten, the lead U.S. Economist at Oxford Economics, said in a note shared to Newsweek. “Existing home sales reflect contracts signed a month or two earlier, and mortgage rates have increased another 50bps since the end of August.”

The increased supply of homes in September suggested that homes are staying unbought due to high rates.

“We don’t expect a sharp increase in inventory, however, as we expect higher rates will keep both home buyers and sellers on the sidelines,” Vanden Houten said. “Weaker demand will put some downward pressure on prices as the year winds down, but we expect tight supply will continue to cushion the downside for prices.”

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