Real Estate Associations Urge the Federal Reserve to Stabilize Housing Market
In a joint letter addressed to Federal Reserve Chair Jerome Powell, three major real estate trade groups – the Mortgage Bankers Association (MBA), the National Association of Realtors (NAR), and the National Association of Home Builders (NAHB) – have collectively urged the Federal Reserve to exercise caution in its interest rate policies to mitigate further volatility within the housing market. This move marks the first direct communication between these groups and the central bank since the Fed’s campaign of rate hikes commenced in March 2022, underscoring the growing concern surrounding the ongoing uncertainty regarding the Fed’s rate trajectory and its potential impact on the housing sector, which may subsequently ripple through the broader economy.
The letter calls for the Federal Reserve to provide clarity by publicly affirming that further rate hikes are not under consideration and committing to refrain from additional sales of mortgage-backed securities until stability is restored within the housing finance market. It emphasizes that the current rate increases have exacerbated housing affordability challenges and intensified disruptions in the real estate market, which is already grappling with a significant drop in mortgage originations and home sale volumes. These complications emerge against the backdrop of an acute shortage of affordable housing.
The groups further assert that any additional rate hikes carry substantial economic risks by increasing the likelihood and magnitude of a recession, which would have a more widespread impact. As of now, the Federal Reserve has chosen not to comment on the letter.
The context surrounding the housing market has seen a marked transformation due to the Fed’s actions, particularly its move to raise the short-term benchmark rate from near 0% in March 2022 to the current 5.25% to counteract inflation. This policy shift indirectly led to higher mortgage rates, with the average rate on a 30-year fixed mortgage tracking the rising yield on the 10-year Treasury. This rate has since exceeded 7% and continues to hover at a 23-year high, with an increasing possibility of reaching 8%.
Consequently, potential homebuyers have retreated from the market due to higher borrowing costs, while existing homeowners are disinclined to sell their properties for fear of losing their existing low mortgage rates. The resultant reduction in property transactions has had a significant impact on real estate professionals, such as agents and brokers, represented by the NAR.
The repercussions have extended to the mortgage market, where application activity has plummeted to its lowest point since 1996, as reported by the MBA. Consequently, layoffs have become widespread within the industry. Even major mortgage lenders, such as US Bank and Wells Fargo, have undergone significant staff reductions in their mortgage divisions.
The diminishing enthusiasm within the homebuilding sector further underscores the broader downturn in housing. The NAHB reported a decline in builder sentiment for the second consecutive month in September, citing eroding buyer purchasing power as mortgage rates exceeded 7%.
Despite the real estate industry’s concerns regarding the housing market’s slowdown, the Federal Reserve has consistently expressed its intent to maintain higher interest rates over an extended period. While investors deliberate the meaning of “longer,” Dallas Fed President Lorie Logan has cautioned that if the economy remains strong, restrictive financial conditions will persist until the central bank achieves its 2% inflation target.
However, the real estate groups argue that given housing’s substantial contribution to nearly 16% of gross domestic product (GDP), further interest rate hikes could pose a substantial threat to the economy. They recommend specific steps to instill confidence within the market, including providing a clear roadmap for the Fed’s rate path and its plans for the mortgage-backed securities portfolio. By taking these measures, the groups aim to reduce volatility for traders and investors while ensuring the housing sector does not become the catalyst for an economic downturn that the Federal Reserve has been striving to avoid.