Housing and the Economic Outlook

Eakinomics: Housing and the Economic Outlook It is no secret that the housing sector has been hit hard by the Federal Reserve’s fight against inflation. The combination of increases in the federal funds rate to a range of 4.50 percent to 4.75 percent with decreases in Fed holdings of mortgage-backed securities have sharply increased 15-year and 30-year fixed rate mortgages (see below). Unsurprisingly, the demand for housing has fallen off and diminished the incentives to build single-family homes and multi-family apartments. Housing starts (below) have dropped nearly to the levels seen in early 2020 as the pandemic swept the continent, although not to the post-bubble levels in 2009. These changes are standard transmission channels for monetary policy. Monetary tightening reduces housing starts and construction, which diminishes the demand for the goods and services that are embedded in new housing stock. The demand for durable goods such as refrigerators, HVAC equipment, washers and dryers, and so forth is especially affected. This channel is one part of the Fed’s relative success in bringing down goods-price inflation. Over the past six months, the annualized inflation rate (measured by the personal consumption expenditures price index) for goods is 2.1 percent. In contrast, services inflation remains at 5.0 percent over the same period. That’s the good news. The bad news is that the construction slump means fewer jobs, and that typically presages a decline in the overall demand for labor in the economy (see below). A key indicator of the near-term outlook, then, is whether the housing market has bottomed out or not. The data suggest that it has not yet; the sooner this moment arrives, the more promising will be the overall outlook.