Your browser does not support JavaScript! Pls enable JavaScript and try again.

Wealth Insights

A Big Chill?: Housing, Inflation and the Fed

Posted on

COVID caused an unexpected boom for housing in the United States. New and existing home sales reached their highest levels since 2000 in units in and on a per-capita basis during the pandemic. COVID also instigated a huge migration across the US. In short, consumers “went large” on real estate and its embellishment, with fuel provided by extremely low interest rates and stimulus payments.

Housing is a meaningful part of the US economy, representing 16.7% of GDP (inclusive of construction, rents and utilities). And so, the impact of inflation and interest rates on homeowners gives us meaningful and timely trend data on future consumer behavior and buying patterns, information that (in our opinion) the Fed should pay close attention to.

The Fed’s focus on raising interest rates to “fight inflation” is having a direct and immediate impact on housing. Mortgage rates mirror the Fed’s intended course for rates.

  • The US housing market is now being chilled, even though core US consumer demand for housing remains unsatisfied. New and existing home sales and construction have fallen at a double-digit pace in 2022, despite the fact that employment gains in the US year-to-date remain strong.

  • Overall, today’s extremely low level of “for sale” US housing inventory, compounded by low levels of new home construction at a national level, are limiting housing price declines. This is very important, as a sizable level of household wealth is tied up in housing (see Figure 5). And it means we are unlikely to experience a severe housing recession, certainly nothing like the housing crash of 2007-2009.

  • The rapid jump in 2022 mortgage rates has been anything but moderate. The increase in rates across various mortgage products has been the largest six-month change since 1981. The absolute rate levels for mortgages have not been this high since 2008…

Chart: 12-month change in mortgage rates

Portfolio Considerations

  • High mortgage rates will result in lower home buyer traffic and sales as affordability reduces the number of prospective buyers and high levels of inflation impacts their confidence. For a buyer with a conventional 20% down payment, the increase in mortgage rates this year has raised the total cost of purchasing a home (if the house price was constant) by 33% in just the last six months; the change has been even larger for borrowers with less than stellar credit.

  • While the US economy is far less “housing reliant” than it was at the peak of 2008, a drop in housing will nonetheless constrain overall US economic growth.

  • From the Federal Reserve’s perspective, the upshot of higher mortgage rates is that it will dampen demand and likely cool inflationary pressures over time with national home price declines often lagging the rise in mortgage rates by about a year. Currently, the Atlanta Fed’s widely followed GDP now tracker suggests a softening in residential investment will have a negative impact on second-quarter 2022 real GDP (potentially pulling it down by 0.4%). CIO expects this trend will continue for several quarters and hope the Fed will be watching carefully as it does so.

Related Articles