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Housing sector is showing signs of picking back up: Powell 

Housing sector is showing signs of picking back up: Powell 

Powell said the Fed will "proceed carefully" as whether to tighten further or hold the policy rate constant

In a hawkish tone, Jerome Powell said that Federal Reserve (Fed) officials are prepared to raise the federal funds rate further and hold it at high levels until they are confident that inflation is moving sustainably down to the 2% target. And that’s unclear at this point.

There are some sources of pressure on U.S. prices — among them is the housing market, Powell said Friday morning during an economic policy symposium in Jackson Hole, Wyoming. 

“So far this year, GDP [gross domestic product] growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust,” Powell said. 

“In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

Powell said that the effects of monetary policy became apparent soon after liftoff in the housing sector. Mortgage rates doubled in 2022, causing housing starts and sales to fall and house price growth to plummet. 

In fact, mortgage rates kept an upward trend in 2023, following the Fed’s moves to combat persistent inflation. On Friday, the 30-year fixed mortgage rate was 7.37% at Mortgage News Daily, the highest in over two decades. Economists see rates potentially reaching the 8% level

Regarding the housing services inflation, Powell said it lagged the monetary tightening. According to him, the main concern here is rents, which have only begun to slow down. “We will continue to watch the market rent data closely for a signal of the upside and downside risks to housing services inflation,” he said. 

Other components of inflation show different trends.

Core goods inflation has fallen sharply due to tighter monetary policy and the slow unwinding of supply and demand dislocations. Less sensitive to the Fed moves, nonhousing services, which account for over half of the core PCE and include items such as health care and transportation, have moved sideways since liftoff, Powell said. 

The labor market continues to rebalance, with improved supply and moderated demand. This rebalancing has eased wage pressures. The Fed expects the trend to continue, but evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response, Powell said. 

Committed to the 2% target 

The core PCE inflation index, closely watched by the Fed officials, peaked at 5.4% on a 12-month basis in February 2022 and declined gradually to 4.3% in July 2023. 

The lower monthly readings in June and July of 2023 were welcome but only “the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said.

“We can’t yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters. Twelve-month core inflation is still elevated, and there is substantial further ground to cover to get back to price stability.”

The Fed, however, remains committed to the 2% inflation target, Powell said. It’s challenging to know when such a stance has been achieved in real-time, he remarked. 

Despite Powell seeing the current rate as restrictive to the economy, he can’t identify with certainty the neutral rate of interest – the rate at which monetary policy is neither stimulating nor restricting economic growth – which brings uncertainty about how high rates should be. In addition, it’s not clear the duration of the lags with which rate hikes affect economic activity and inflation. 

“As is often the case, we are navigating by the stars under cloudy skies,” Powell said. “We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”  

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How is the NAR Addressing Housing Affordability Challenges in the US?

The National Association of REALTORS® has been working with authorities to create expanded housing options.

Sharp increases in home prices and a lack of housing inventory in the U.S. have resulted in a housing affordability crisis, where both rental homes and homes for purchase are beyond the reach of low- and middle-income families.

To address this watershed moment in real estate, the Department of Housing and Urban Development (HUD), with Secretary Ben Carson taking the lead, has been hosting meetings to discuss these matters with issue experts. HUD also published a Request for Information (RFI) to solicit ideas from the real estate industry and brainstorm solutions.

In comments submitted to HUD, the National Association of REALTORS® (NAR) stressed that affordable housing is critical to America’s communities and businesses. To address housing affordability issues, NAR offered HUD a series of policy considerations that encourage all market players to collaborate to provide safe and affordable housing. These included:

  • Enhancing Mortgage Market Liquidity – Re-focus the mission of Fannie Mae and Freddie Mac on providing liquidity in the mortgage markets for low- and middle-income homebuyers.

  • Reforming the CRA – Clarify existing regulations under the Community Reinvestment Act (CRA) so banks can receive “credit” for serving the lending needs of middle-income households.

  • Incentivize YIMBY – Foster a “Yes in My Backyard”—or “YIMBY”—market to encourage states and localities receiving federal dollars to reform high-density zoning and other land-use rules.

  • Community Development Block Grant (CDBG) Funds – Encourage states and localities to update their comprehensive housing and development plans to address barriers to housing affordability. If they do so, they receive additional CDBG funds.

  • Accessory Dwelling Units (ADUs) – Allowing for development of ADUs is a simple way to increase density and affordable housing. State and local laws can protect the rights of property owners and concerns of neighbors about increased traffic or demand for resources.

NAR also commended the Administration for the work it has already done to improve housing affordability. Since May 2019, HUD has taken several actions, including:

  • Finalizing the FHA Condo Rules – Condos are often the most affordable option for first-time buyers, urban dwellers and those wishing to downsize. HUD’s reform of FHA’s condo rules should yield thousands of new homeownership opportunities and help alleviate affordability restraints impacting markets across the country.

  • Repealing and Replacing WOTUS – The Administration repealed the 2015 Waters of the U.S. (WOTUS) rule and replaced it with a common-sense regulation that more clearly defines the regulatory limits of the Clean Water Act. The Navigable Waters Protection Rule will provide predictability and reduce red tape and lower costs for real estate developers, which will lead to the construction of more homes in all real estate markets.

  • Creating Qualified Opportunity Zones – NAR applauds the creation of the White House Opportunity and Revitalization Council, chaired by Secretary Ben Carson. Opportunity zones have great potential to address housing affordability across our country. HUD has also provided additional incentives for development in opportunity zones through FHA products.

Although there is no single solution to promoting housing affordability and increasing housing supply, NAR does believe that a broad-based policy approach to bring safe, decent and affordable housing to low-income households, as well as methods to enhance the availability of affordable middle-income housing, can be achieved. We look forward to working with HUD and our partners in the real estate industry to reach these goals and improve access to the American Dream of homeownership. 

Russell Riggs is NAR’s senior environmental policy representative. For more information, please visit www.nar.realtor.

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