News : The Fed and the U.S. housing crunch

Wednesday, January 3, 2024

The Fed and the U.S. housing crunch

Jan 03, 2024

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QUICK FIX

Amid all the happy talk about the U.S. heading for a soft landing, housing — which makes up as much as 18 percent of GDP — could still pose a major challenge to the economy, according to analysts MM caught up with for their take on the 2024 outlook for the industry. But everything depends on the Fed.

At the heart of the issue is a major supply crisis 15 years in the making, following years of under-building in the wake of the 2008 financial crisis. The National Association of Realtors pegged the shortage at between 5.5 million and 6.8 million units in 2021, noting that residential fixed investment had fallen as a share of GDP from its typical level of 5 percent to 3 percent in the years after the crisis.

The shortage in supply, paired with a growing population and strong demand, has relentlessly driven up the cost of housing, making the normally interest-rate-sensitive sector slow to respond to Fed interest rate hikes.

The effects of the supply crunch could become a political issue this election year, according to Isaac Boltansky, director of policy research at BTIG.

“My sense is that we could see the housing affordability and supply crises elevated [on] the campaign trail. From homeownership being out of reach to institutional investors in the space, there’s a fair amount of political hay to be made from that corner of the economy.”

Lawrence Yun, chief economist at the National Association of Realtors, expects mortgage rates — currently at 6.6 percent for a 30-year-fixed — to fall to about 6.3 percent by the end of the year if the Fed loosens its grip as expected and starts to cut rates. That’s still a lot higher than in 2020, but it’s down from the 7.8 percent rate Freddie Mac notched in October.

“With mortgage rates measurably lower already, this is a sign that the worst in housing, at least in terms of home sales, is over — there will be more transactions, more buyers coming onto the market,” Yun said.

“It seems like we are almost getting a perfect soft landing, but something to worry about is what happens if inflation somehow remains high, If the job market remains exceptionally tight,” he added. “Higher inflation just means the Fed will be much more cautious, which means mortgage rates will remain on the high side.”

Michael Bright, CEO of the Structured Finance Association, is also keeping an eye on the Fed: “We are closely watching the most recent drop in interest rates and hopeful that they have found a range they can stay in,” he said. “That would very much help this year’s spring buying season, which we are badly in need of.”

Lower rates should free up some homeowners locked into the 3 percent mortgages of 2020 to list their homes, according to Rob Dietz, chief economist at the National Association of Home Builders.

“One of the challenges is that mortgage rates moved up so quickly that a lot of homeowners had mortgage rates well below market rate, and that’s one of the factors that in the short term has held back inventory” coming onto the market, he said.

Builder sentiment is improving, Dietz noted. But “as the volume of homebuilding rebounds, we expect lumber prices to go up again,” he said. “There’s going to be stops and starts along the way and those supply-side challenges remain.” Real, lasting improvements to the supply deficit won’t happen until the “second half of this decade,” Dietz said.

David Dworkin, president and CEO of the National Housing Conference, is skeptical that mortgage rates will fall enough to entice wary sellers off the sidelines this year.

“The move-up market, which is a key to having a healthy inventory level, is still frozen and is likely to be frozen throughout the entire year unless we go into a recession, which is not likely,” Dworkin said.

“Unless the Fed significantly cuts rates, the cost of moving up is prohibitive,” Dworkin said. “The income necessary to buy the exact same house in 2024 compared to 2019 is double because of home price appreciation and interest rate growth.”

Happy Wednesday. Thoughts on where housing will go in 2024? Share them with me at kodonnell@politico.com.

Driving the day

First in MM — A new brief from the Center for American Progress today finds that 57 percent of workers earned higher annual inflation-adjusted wages in November 2023 than in the previous year. “Real average wage growth for a typical worker has seen the second-fastest recovery during this recession recovery of all five recession recoveries since 1980,” CAP’s Brendan Duke writes.

Soft landing in focus — The top official at the International Monetary Fund said Tuesday the U.S. economy is “definitely” in line for a soft landing. IMF Managing Director Kristalina Georgieva told CNN that the Fed’s fight against inflation has “brought the desired impact without pushing the economy into recession.”

Georgieva said Americans should “cheer up” about the economy. “My message to everyone is: You have a job and interest rates are going to moderate this year because inflation is going down,” she said.

ESG wars — Our Jordan Wolman reports that the conflict over corporate environmental, social and governance policies is poised to rage on in 2024. Republican officials and right-leaning groups are aiming to redouble attacks while lawmakers and activists on the left plot pushback against a campaign that has silenced Wall Street.

“The rhetoric is starting to heat up,” Adam Geller, the founder and CEO of National Research Inc., a Republican polling and strategy firm, said in an interview last month.

Trade

RIP ‘worker-centered trade’ — Our Gavin Bade has a look at how President Joe Biden’s ambitious plans to rewrite the rules of global trade — and blunt Donald Trump’s economic message against him — are running aground just as the nation enters election season.

Senate Banking Chair Sherrod Brown, facing a tough reelection campaign in Ohio that could determine control of the upper chamber, is among the Democrats who have pushed back on aspects of Biden’s trade agenda.

“There were some big concerns that we would be retreating back to the day where trade was a race to the bottom, especially for workers,” said Sen. Tammy Baldwin, a Wisconsin Democrat facing a reelection race this year.

Feds charge former fintech exec — Federal prosecutors on Tuesday charged a Nigerian businessman with lying to investors about his companies’ finances. Reuters reports that Odogwu Banye Mmobuosi, the former co-CEO of Tingo Group, was charged with securities fraud, making false SEC filings, and conspiracy in an indictment Tuesday.

On the Hill

New Menendez bribery allegation — Federal prosecutors unveiled new allegations Tuesday that embattled Sen. Bob Menendez (D-N.J.), who was first indicted on bribery charges in September, used his power to help Qatar’s government. Matt Friedman reports that new legal filings allege Menendez, a senior Senate Banking Committee member, spoke kindly of Qatar in official proceedings to help a developer friend who paid him bribes.

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