Housing Industry's Plea: Powell Urged To Hit The Brakes On Rates

Mortgage rates hovering near 8% — the highest level in 23 years — are taking a toll on the housing market. 

Demand for housing loans has fallen to the lowest level since 1996, with total application volume declining 6.9% over seven days ending Oct. 18, according to the Mortgage Bankers Association's seasonally adjusted index. 

The median home price has surged to $407,100, with the existing housing stock representing only a 3.3-month supply. Given the housing shortage, housing inventory needs to double for prices to drop, according to the National Association of Realtors.

Industry leaders are concerned about further rate hikes and their impact on the housing market. They're urging the Federal Reserve to reconsider its hawkish stance. On Oct. 9, the National Association of Realtors, National Association of Home Builders and Mortgage Bankers Association wrote an open letter to Fed Chairman Jerome Powell asking him to pause future rate hikes. 

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Fed's Plans To Hike Rates 

The Federal Open Market Committee raised the benchmark overnight federal funds rate 11 times between March 2022 and July 2023. The rate now is between 5.25% and 5.5%, the highest in over 22 years. 

"The speed and magnitude of these rate increases, and resulting dislocation in our industry, is painful and unprecedented in the absence of larger economic turmoil," the letter stated.

Following 11 consecutive hikes, the Fed left the benchmark rates unchanged in September, bringing some much-needed relief to the market. But Powell reiterated his commitment to a hawkish stance, irrespective of "short-term pain" to the market. 

"Given the uncertainties and risks and how far we have come, the committee is proceeding carefully," Powell said last week. "We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook and the balance of risks."

Powell has yet to make an explicit statement regarding his decision to raise rates in the near term, fuelling uncertainty in the housing market. 

As of Oct. 9, the difference between the median 30-year mortgage rate and 10-year Treasury yield is approximately 120 basis points, which can be chalked up to market uncertainty. This translates to an extra $245 per month on home loans for 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 stated.

Open Letter To Powell 

Rising interest rates have "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," according to the letter to Powell. 

So far, Powell has brought down the inflation rate from 2021 highs without causing a full-blown recession, successfully executing a "soft landing."

Nonetheless, the growing pains in the housing market could result in an economic catastrophe if the Fed isn't careful, according to the letter.

In addition to pausing rate hikes, the letter also urged the Fed to "not sell off any of its MBS [mortgage backed securities] holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized."

This comes as the Fed sold approximately $230 billion worth of mortgage-backed assets since June 2022.  

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