Housing is at the center of the evolving economic outlook and economic monetary challenges. Indeed, as AAF’s Thomas Wade put it in his recent advisory on How Not To Blow Up the Housing Market: “Depending on interpretation, the housing market is either boiling or has already collapsed. The economy writ large is either strong or in a recession.” To aid in the assessment, Wade regularly updates the AAF Housing Chartbook; the latest edition is available today.
Looking at these data, one can see that the Federal Reserve’s anti-inflation efforts are having a clear impact on housing. The Fed has raised interest rates, but spreads on mortgage rates over Treasuries have widened as well, probably the result of the “quantitative tightening” – shrinking the Fed balance sheet by $35 billion monthly in mortgage-backed securities. Demand to refinance existing mortgages has essentially fallen to zero and new mortgages to purchase homes are down sharply. Not surprisingly, across the nation house price increases have moderated or even turned negative. The spillover to housing starts, residential construction, and the broader macroeconomy will grow in magnitude over the coming quarters.
In his assessment, Wade concluded “while there is little Congress and the federal agencies can do to improve housing supply in the short term, they could do much in haste and good intentions that would further muddy the economic waters. At worst, further demand-side subsidies would undo the Fed’s efforts, increasing the pain of inflation, the risks of recession, and the length of economic recovery.” Treacherous times, indeed! He added, however, “Such a challenging time for the housing market would not represent the safest testing ground for Congress or the federal agencies to experiment with sweeping changes to how the market operates.”
In light of this, the first public speech of Michael Barr, the newly confirmed Vice Chair for Supervision at the Fed, is of some interest. Far from seeking to minimize impacts on housing, mortgage, and financial markets, he lays out an aggressive and interventionist agenda for the regulatory future. Like the entire bevy of Biden financial regulators, he places a premium on “fairness” in outcomes and is skeptical of all mergers.