Housing market outlook: Chief economist says no rate hikes this year

Towards the end of last year, there were predictions that the Federal Reserve would cut interest rates several times; The number six was floating around. But for now, with inflation proving more persistent than expected, the market is only pricing in a rate cut in September, according to Apollo Global Management chief economist Torsten Slok.

“It’s a pretty dramatic change,” Slok said yesterday on CNBC.

He mentioned Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, who said yesterday: “Most people thought we would be in a recession at the end of last year, but that didn’t happen. Instead, we have very strong growth. American consumers have remained remarkably resilient. The real estate market has remained resilient. So I don’t see the need to rush and make rate cuts. “I think we should take our time and do it right.”

But he did not rule out interest rate increases this year.

“I don’t think we should rule anything out at this point,” Kashkari said, suggesting the country has the “luxury” of waiting to see where inflation will go before making any decisions on interest rates.

However, Slok does not expect rate hikes this year. Still, the fact that Kashkari even mentioned that he is not ruling out interest rate hikes shows that inflation is not “coming down to 2% as fast as the Fed currently thinks,” Slok said.

And housing is a key part of that. “Let’s not forget that housing has a weight of approximately between 35% and 40% of the CPI index, depending on how it is measured,” explained Slok; The consumer price index is a measure of the average change over time in the prices of goods and services. “So it means housing is a really critical component for the Fed as it tried to hit the 2% inflation target.” When the Federal Reserve reaches its 2% target and prices are considered stable, it lowers interest rates, although it can also make cuts sooner.

But as we already know, housing supply is very weak, in some areas more than others, while demand is strong: people need housing. But “the textbook would have predicted that when mortgage rates rise in the 7% to 8% range,” demand would soften, but because there is so little supply, it hasn’t done so significantly. This is reflected in the latest figures from Case-Shiller, which measure the monthly change in single-family home values. Data shows that home prices rose 6.5% in March from a year earlier. It also happened to be the ninth all-time high for home prices in the last year. (Rents have stabilized, but remain high.) Mortgage rates have fallen from their more than 20-year high to just over 8%, but remain substantially higher than during the pandemic. At last reading, the average 30-year fixed mortgage rate was 7.34%.

Housing “remains a fairly significant risk, which could put upward pressure on inflation in the coming quarters,” Slok said, adding that Fed Chair Jerome Powell has been focusing on supercore inflation, which excludes food, energy and housing, “in an attempt to say, well, housing we can’t really control. So let’s try to take that out of the equation and eliminate it from the index.”

But in recent months, other components have begun to reaccelerate, he said. “The tailwind for consumption, and particularly for consumer services, is really strong, and that’s the challenge that supercore inflation has also been going up.”

Housing is harder for the Fed to control because it can’t necessarily build more housing, but it can try to control broader consumption, he said. Still, that is the challenge ahead for Powell and the powers that be. There are various estimates about the number of houses we are missing, although they are all in the millions. Powell himself has said it: the current problems we are seeing in the housing market due to very high mortgage rates are short-term, while the real problem is deeper.

“The housing market is in a very difficult situation right now,” Powell said in early March. “The problems associated with lock-in mortgages and high-rate mortgages and all that will diminish as the economy normalizes and rates normalize,” he said, referring to the disconnect between homeowners. below-market rate homes and current supply that somehow led to existing home sales falling to their lowest point in nearly three decades last year. “But we will still be left with a nationwide housing market where there is a housing shortage.”

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