Fed sees ‘modest’ economic and housing improvements in Boston
Federal Reserve Chair Jerome Powell abandoned his “transitory” inflation narrative months ago and has since steered the central bank toward its tried-and-true playbook for taming inflation: Raise interest rates until demand recedes and soaring price growth abates.
The Fed’s plan might be working. Early data suggest the economic shock caused by spiking mortgage rates is beginning to soften homebuyer demand.
“The sharp increase in mortgage rates is pushing more homebuyers out of the market,” wrote Daryl Fairweather, chief economist at Redfin, in a report published on Thursday.
According to Redfin, 12% of homes on its site saw sellers cut prices in the week ending April 9. That was the biggest one-month spike Redfin saw in price cuts since 2015. Over the past month, there was also a 3% drop in requests for home tours.
Let’s be clear: The jump in sellers cutting prices doesn’t mean home prices are about to plummet. Many of their properties were likely listed above market value, and home shoppers simply didn’t bite. That said, homebuyers being less eager to bid the market upward could indicate, in theory, some softening in the market. It also could signal that home price growth is finally decelerating, i.e., prices could start increasing at more moderate levels.
The fact that homebuyers are pushing back on record prices shouldn’t come as a surprise. Over the past two years, U.S. home prices have soared 32.7%—including 19.2% over the past 12 months. The sting of those soaring prices was lessened, to a degree, by the record low mortgage rates we’ve seen during much of the pandemic. But the end of team transitory means homebuyers are feeling the full brunt of exorbitant home prices.
Over the past four months, the average 30-year fixed mortgage rate has spiked from 3.11% to 5%. A borrower who secured a 3.11% rate on a $500,000 mortgage would owe $2,138 per month over the course of the 30-year loan. At a 5% rate, that principal and interest payment would spike to $2,684.
Factoring in the growth of both mortgage rates and home prices, Redfin says, the typical new mortgage payment has spiked 35% year-over-year to an all-time high of $2,288.
Not only do soaring mortgage rates price out some home shoppers, they mean some borrowers—who must meet lenders’ strict debt-to-income ratios—will lose their mortgage eligibility altogether.
A softening housing market would be welcomed by many housing economists. In their eyes, current levels of home price growth simply can’t be sustained forever. The longer this goes on, the higher the likelihood of an overheated housing market. Or worse: If it doesn’t let up, we could end up in a full-blown housing bubble. Just last month, the Federal Reserve Bank of Dallas published a paper titled “Real-time market monitoring finds signs of brewing U.S. housing bubble.”
Federal Reserve Chairman Jerome Powell unveiled a new framework of thinking for the central bank that will tolerate inflation “moderately” above its 2% target. The Fed also committed to reviewing this policy every five years.
In a speech on Thursday morning, Powell acknowledged the painful lessons of runaway inflation in the 1970’s, but warned that the persistence of low inflation over the last eight years risks new economic difficulties.
“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said. But the Fed chief warned that low inflation leads to declining inflation expectations, which has the effect of “diminishing our capacity to stabilize the economy through cutting interest rates.”
The Fed’s target for inflation is 2%, measured as core personal consumption expenditures (which excludes volatile components like energy and food prices). But since establishing that goal in its 2012 Statement on Longer-Run Goals and Monetary Policy Strategy, the Fed has averaged inflation of only about 1.6%, touching 2% only briefly in 2018.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
In its “Beige Book” report, the Fed says the overall economy in New England is “expanding at a modest pace,” with the housing market following the same general trend:
Year-over-year sales growth continued in August in both single-family home and condominium markets throughout the First District. According to contacts, low interest rates and affordable prices contributed to improving sales figures, along with increases in residential rents. Several contacts report improving conditions for borrowers, but many contacts say that qualifying for a mortgage remains difficult.
As for prices, contacts in the region report mixed movements in median sale prices, with some areas experiencing modest price appreciation and others moderate depreciation. In the Greater Boston area, contacts say a slight decline in the median sale price was unexpected in light of significant demand and dwindling inventory levels; they attribute the decline to significant increases in the sales of low to mid-tier properties. Throughout the region, inventory continues to decline. Contacts say they fear declining inventory will discourage buyers searching for homes as well as potential sellers who may not be able to find another well-kept property. Increasingly, properties in “move-in condition” receive multiple bids, sometimes above original asking prices.
Contacts expect sales to continue to grow on a year-over-year basis in the next several months. Nonetheless, many note that the recovery remains fragile and could be derailed by deterioration in economic conditions. Declining inventory levels also remains a concern, but several contacts expect an influx of sellers in the spring market. Median sale prices are expected to remain flat or improve modestly in the coming months.
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