Housing Groups Tell Fed to Stop Raising Interest Rates

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Mortgage rates recently surged to a 23-year high and have floated above 7% for weeks. There are concerns rates could go even higher—possibly reaching 8%—prompting some housing groups to confront the Federal Reserve about its monetary policy.

The National Association of REALTORS® joined the National Association of Home Builders and the Mortgage Bankers Association to issue a letter this week to Fed Chairman Jerome Powell, saying that uncertainty around the Fed’s rate path is contributing to recent hikes in mortgage rates and market volatility. The groups say that this has “exacerbated housing affordability and created additional disruptions for a real estate market that is already straining to adjust to a dramatic pullback in both mortgage origination and home sale volume.”

The groups also note in the letter that such market challenges are occurring in the midst of an historic shortage of affordable housing inventory, further hammering would-be home buyers.

Mortgage demand for home purchases is the lowest it’s been since 1996, the MBA reports. Freddie Mac reported last week that the 30-year fixed-rate mortgage averaged 7.49%. Moody Analytics Deputy Chief Economist Cristian deRitis told MarketWatch that 8% rates could arrive “within days, depending on how investor sentiment shifts.”

Why Are Rates So High?

Mortgage rates tend to follow 10-year Treasury yields. However, the spread between rates and 10-year yields are at historical highs as markets await the Fed’s next move. The Fed, which has raised interest rates 11 times in the last year to fight inflation, voted to pause rate hikes at its September meeting but signaled another one was likely before the end of the year. The Fed’s next meeting is Oct. 31.

Meanwhile, NAR, NAHB and MBA note that the mortgage-to-Treasury rate spread is costing home buyers an extra $245 in monthly payments on a standard $300,000 mortgage. “Further rate increases and a persistently wide spread pose broader risks to economic growth, heightening the likelihood and magnitude of a recession,” the letter warns.  

‘Soft Landing’ or ‘Hard Landing’?

The real estate market accounts for nearly 16% of the U.S. economy, so it’s necessary for the Fed to be more transparent in communicating its rate path to avoid a “hard landing” for housing, the groups argue.

The Fed has been adamant that the Consumer Price Index would need to reach its desired 2% target before it would stop raising rates. In September, Powell acknowledged progress in taming inflation but said, “We need to see more progress.” Forty-one percent of real estate economists say they expect that inflation won’t settle at the Federal Reserve’s preferred 2% goal until the end of 2025, according to a newly released Bankrate.com survey.

The CPI continues to show high shelter costs, which many blame for keeping inflation elevated. In July, shelter inflation was attributed to 90% of the gain in consumer prices. “The most effective approach to tame shelter costs, and assist on the broader inflation fight, is to facilitate the construction of attainable, affordable housing,” the housing groups’ letter to Powell states. “Sustained wide spreads or further increases in interest rates make this economic goal more challenging by limiting lot development and home construction, exacerbating housing supply and pricing out millions of households from the goal of homeownership.”

Meanwhile, the overall economy has made some progress despite the higher rate environment. The latest jobs report, released last week, showed that there are 4 million more available jobs in the U.S. than in March 2020 before the COVID-19 pandemic. But “it does not mean all is well,” says NAR Chief Economist Lawrence Yun. “The fast-rising interest rates are breaking several sectors of the economy. The remaining sectors will also likely crack if the rate hikes continue. Given that the inflation rate is already cooling, the Fed needs to stop raising rates and strongly consider cutting interest rates next year. That would be the ‘soft landing’ without the net job cuts to the economy.”