The Housing Market Makes The Fed’s Job Harder

Federal Reserve officials are counting on higher mortgage rates to throw cold water on the frenzied housing market. However, Jonnelle Marte at Blomberg reports that some aren’t convinced that will happen…(Bloomberg)

• Supply-Side. The Fed can directly impact demand, but it can’t do anything about supply which is the main driver of these continued home price spikes. Marte writes that “While rising rates and higher home prices are starting to lock some buyers out and weaken sales, pent up demand for housing, combined with a stark shortage of homes on the market, is still putting upward pressure on prices.”

• More! Mark Zandi, chief economist for Moody’s Analytics tells Bloomberg “They’re not going to get the decline in economic activity through housing that they typically get, at least not as quickly as they typically get it…They may have to press on the brakes even harder.”

Housing has become more inelastic during the pandemic. Rising home prices for the last two years have done nothing to deter demand. Some may argue that lower rates were blunting the pain of those price increases but that has not been the case for the whole pandemic. This was true in 2020, but rates bottomed in January of ’21. Therefore, rates have been rising along with prices for over a year and we have seen almost zero declines in demand. This has changed recently as some data has shown a slight dip in demand as rates have crossed the 5.0% mark. However, it’s clear housing is less responsive to rising borrowing costs than other aspects of the economy. This makes the soft landing much more difficult as the Fed will have to raise rates past the point it is impacting the rest of the economy in order to have any effect on housing.