If the Fed continues to hike rates, the housing market will be decimated, possibly leading to a recession, three of the industry’s most powerful trade groups – the Mortgage Bankers Association (MBA), the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB) – warned the Board of Governors of the Federal Reserve System in a recent letter.
In the joint letter to Fed Chairman Jerome Powell, the groups share their “profound concern … among our collective memberships that ongoing market uncertainty about the Fed’s rate path is contributing to recent interest rate hikes and volatility.”
“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. These market challenges occur amidst a historic shortage of attainable housing.”
The shape of the current housing market is unprecedented in that mortgage rates and home prices are both at the highest levels in more than 20 years – the latter due mainly to an acute lack of available inventory. Yet demand is strong, were it not for the lack of affordability. Meanwhile, the rest of the economy, including the labor market, seems to be chugging along fine.
As a result of the high rates, however, mortgage application volume is at the lowest since 1996, according to the MBA.
“Today, the spread between 30-year mortgage rates and the 10-year Treasury yield is at historically high levels, signaling deep-seated uncertainty about where the Fed is headed,” the letter states. “The difference between the current spread and the long-run average indicates mortgage rates for homebuyers across the country that are at least 120 basis points higher than they otherwise would be.”
The groups warn that further rate increases could “pose broader risks to economic growth, heightening the likelihood and magnitude of a recession.”
The groups conclude by urging the Fed to make it clear that it “does not contemplate further rate hikes” and further that it will “not sell off any of its MBS holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized.”
“These steps will provide the market greater certainty about the Fed’s rate path and its plans for the MBS portfolio and reduce volatility for traders and investors.”
Photo: Etienne Martin
