The Fed Is Choking Real Estate in America and Will Continue "Until the Job Is Done".
This correction is explicitly desired by the Fed to cool down the economic machine.
While he has long denied the reality of inflation, Jerome Powell has now decided to fully address this problem, and he has redoubled his determination during his latest media interventions. “Until the job is done,” the Fed will now be adamant about tightening its monetary policy.
If there is one sector of the U.S. economy that is feeling the full brunt of the Federal Reserve's belated crusade against inflation, it is the housing sector. The number of home resales, for example, fell in August 2022 for the seventh consecutive month. Not seen since the great subprime crisis in 2007. The number of transactions is now 20% lower than in August 2021.
However, the Fed has no qualms about this. By raising its main policy rate by another 75 basis points on Wednesday 21 September 2022, the Fed knows full well that it will worsen the contraction already underway in this sector. Jerome Powell even seems convinced that he is acting in the interest of the real estate market by precipitating the bursting of a bubble: “We are probably headed for a correction after a period of white-hot price increases that have pushed homeownership beyond the reach of many Americans,” he explained to the press just after the announcement of the Fed Funds rate increase.
This is the fourth hike since March 2022 and the third by 75 basis points.
“There was a big imbalance with prices rising at a rapid and unsustainable level,” the Fed boss said, not without reason. Not surprisingly, the morale of residential construction professionals is at half-mast. In September 2022, it has fallen for the ninth consecutive month.
The fundamental origin of the evil is simple in their eyes: the doubling, in one year, of the interest rates required from borrowers. For example, the rate on 30-year mortgages has just risen above 6%. This is a level not seen since 2008. The Fed's key rate hikes are directly responsible for this surge.
The fall in the number of new building permits announced for August 2022 is in line with this “correction” explicitly desired by the Fed, which wants to cool the economic machine at all costs to curb inflation. Another sign of the expected cooling: for the first time in eighteen months, the average selling price of homes in August 2022 fell below the starting price offered by the seller.
Homeowners prefer to rent
Even without the tightening of monetary policy since March 2022, the housing market would have been adversely affected by the end of another exceptional housing demand booster from mid-2020. The end of the COVID-19 pandemic has calmed the exodus of households cramped for space in the city centers to the suburbs where houses have more rooms and gardens.
The reluctant return of millions of Americans to their offices at least a few days a week cut short this exodus to greenery. This explains why in August 2022, for the second month in a row, the median resale price of a home declined. It remains at a level that is certainly prohibitive for many first-time buyers, at $389,000. But in June 2022, it was still $413,800.
The sharp rise in mortgage rates is also having a perverse effect. Homeowners, who are still paying off their homes at a fixed rate that is much lower than the new loans being offered, have an increasing incentive not to sell, especially as home prices are falling. They prefer to rent more and more. The result is a drop in the number of properties for sale in markets that were particularly hot, like California.
This is a step away from the Fed's desired rebalancing of housing supply and demand.
For the time being, the Fed has not decided to resell the $2.7 trillion in mortgage-backed bonds it accumulated during the pandemic. It is thus avoiding accelerating the rise in mortgage rates. But the day will come when it has to do so. “For now, it's not a decision we need to make,” says Jerome Powell, who doesn't want to burden the real estate sector too much either.
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