Housing challenges Fed’s campaign to control inflation

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The rapid pace of US home price increases accelerated further last month, making the Federal Reserve’s job of curbing the worst inflation in 40 years even more difficult.

The seasonally adjusted average home sale price jumped 3.6% in April from March, the largest increase in Zillow data dating back to 2012. Inventories have started to rise slightly, but are still so low that demand has significantly outpaced them, resulting in to higher housing prices.

This is very frustrating for buyers who are faced with a combination of scary prices and high mortgage rates. Moreover, housing stagnation – a large component of indicators used to track inflation – means that consumer prices are likely to remain high for much longer. That will dare Fed Chairman Jerome Powell to raise interest rates more aggressively. Increasingly, this looks like it won’t end well.

Stock and bond traders have long known that fighting the Fed – to swim against the tide of tighter monetary policy – is a fool’s errand – but that’s what the real estate market is doing, even as stocks and bonds have tumbled since the start of the year. If the pace of housing price increases slows, it could allow the economy and housing market to reset — a “soft landing” in the Fed’s parlance. But the housing market is choosing to challenge instead.

The latest evidence is the resurgence in popularity of adjustable-rate mortgages, or ARMs, which offer lower initial rates than fixed-rate loans but leave buyers exposed to interest rate risk later in the life of the loan. In the week ending May 6, ARM rose to 10.8% of all mortgage applications, the highest percentage of total volume since March 2008.

Buyers find it more difficult to get the math to work on their home purchases, so they ask brokers to find creative ways to get deals done. This isn’t a systemic disaster – ARM usage is still a fraction of volumes during the 2000s bubble – but rather than moving into later roles in this housing cycle, these products help extend the game.

Booming demand combines with a near-record supply shortage that has no easy solution. Chief Economist Jeff Tucker wrote in Zillow earlier this month that inventory could take until September 2024 to return to 2019 levels. Homebuilders are rushing to bring homes to market, but they face ongoing supply chain disruptions that make it difficult to source materials such as windows and garage doors. , their stock market investors are rebelling and pushing stocks lower, fearing the arrival of new stock. The market is just in time for a sharp downturn.

All of this presents a problem for the Federal Reserve, which has just embarked on a cycle of increasing interest rates. Markets are putting little prospect that policymakers will have to raise the federal funds rate well above 3% to tame the worst inflation since the 1970s, but there is a growing group of economists including former Obama administration adviser Jason Furman. Ken Rogoff Professor at Harvard University; And former Treasury Secretary Lawrence Summers thinks 3% may be too low and the rate could rise to 4% or higher.

Of course, housing isn’t measured directly in key price indices and flows into inflation through rents and a category called owner’s equivalent rent, a measure based on surveyed estimates of what people think their homes will rent.

Because of that, market housing prices are feeding the CPI and PCE with a significant lag, which means that a significant rise in home prices today will be felt in inflation readings through to 2023, according to research from Marijn Bolhuis of the International Monetary Fund, Harvard Goode Kramer. From the university and Summers, former Treasury Secretary. “Even if the house price increases stopped, because we saw such a rise in house prices and because of the lagging structure of the CPI, there were already big inflation increases going forward,” Kramer told me Friday. “Not only has it stopped, it hasn’t started to slow down yet through some special action.”

There appears to be a widespread conviction that increases in home prices will remain positive, even if – as expected – mortgage rates dampen the number of transactions. As the thinking goes, the large demographic of home buying in the new millennium will provide a strong tailwind to demand even after the historical shortfall in supply begins to wane.

To be sure, this may be the last moments of the boom before the rally cools down to a pace the Fed can tolerate. According to Jonathan Miller, chief appraiser Miller Samuel Inc. Buyers may be aware of the price hike risks and rush to close deals in advance. “There is a narrow window of opportunity,” he told me. Spring is traditionally the peak season for real estate, and a frosty summer can take some of the heat off home prices. But if this shows any sign of continuing, the market won’t like what it unleashes on itself: the higher the rally, the Fed will have to push hard against it, risking a violent outcome for the entire economy.

More other writers at Bloomberg Opinion:

A recession won’t be as scary as it sounds: Alison Schrager

• A slowdown in the housing market will not improve affordability: Connor Sen

The Fed Needs to Get Real Information on Interest Rates: Bill Dudley

This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

Jonathan Levine has worked as a journalist at Bloomberg in Latin America and the United States, covering finances, markets, and mergers and acquisitions. Most recently, he held the position of Head of Corporate Office in Miami. He is a chartered CFA.

More stories like this are available at bloomberg.com/opinion

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