Fed's rate hikes hammer housing affordability

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.