Aug 17, 2022 - Economy

Fed's rate hikes hammer housing affordability

Illustration of nails and a wooden plank, with some nails hammered fully in and other nails laying down unused

Illustration: Annelise Capossela/Axios

The Federal Reserve has hit the brakes on the economy, in an attempt to slow inflation. Housing is where the rubber meets the road,

Why it matters: Since the pandemic, the hot housing market — and associated boomlets in renovations and new construction — have been key contributors to the post-COVID economic recovery. That's changing.

Driving the news: The number of newly started homes plunged in July.

  • Starts of single-family homes fell 10% from the prior month, hitting their lowest point since June 2020 near the depths of COVID-era uncertainty.

How it works: Fed rate hikes have helped push mortgage rates sharply higher, making purchasing a new home much more expensive.

  • The 30-year fixed mortgage rate, which was hovering around 3% last November, exploded to over 6% in June. (It's since eased back to around 5.2%.)
  • Since home prices are up over 30% over the last couple of years, the surge in mortgage rates was the perfect cocktail for a collapse in affordability.
  • In fact, housing affordability — as measured by an index produced by the National Association of Realtors — is the lowest since 1989 .
  • Since fewer people can buy a new house, homebuilders are making fewer.
National Association of Realtors Housing Affordability Index
Data: National Association of Realtors; Note: An index of 100 means the typical family has exactly enough income to qualify for a mortgage on the median-priced home; Chart: Axios Visuals

The big picture: This might be a bad thing for economic growth and employment, but by slowing housing demand, the Fed hopes that house prices eventually start to edge lower.

  • If that happens it should take some of the sting out of a key measure of inflation — the Consumer Price Index — which is heavily skewed toward housing costs.
  • But so far there's been little sign of a slowdown in prices. Prices for existing homes — the vast majority of the homes sold — were up 16% since year-end, as of June.

What we — and everyone else — are watching: Home prices, obviously. And not just on Zillow.

  • An update on existing home sales — and prices — is due Thursday at 10am ET.
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