Fed's rate hikes hammer housing affordability
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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.
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.
