Rate-Hike Fears Are Hitting People Where They Live

Safe As Houses?

Wednesday’s meeting of the Federal Open Market Committee is dominating all discussions. That’s inevitable. But if there’s one area where the Fed’s monetary policy could wreak changes, and where many Americans fear that it will, it is on housing.

The latest diffusion index of homebuilders’ confidence produced by the National Association of Home Builders was published Monday. The outlook is still nowhere near as bad as during the housing slump at the end of the ’00s, but it’s declining sharply:

It’s easy to see why homebuilders are getting nervous. Affordability — defined as the ability of someone on the median income to afford a median house at prevailing mortgage rates — had already dipped to its lowest level since the top of the last housing boom in 2006 by the time it was last measured at the end of the second quarter. Rises in average mortgage rates since then (shown inverted on the following chart) more or less guarantee that affordability has worsened:

The housing market is a critical area where tighter monetary policy can have a big effect, with a lag. Turning to the rental market, Zillow’s index of the rate of inflation in leases taken out each month is inflating much more slowly than at the peak last fall. The bad news for the Federal Reserve, and for those thinking of renting a house, is that monthly inflation continues to be significantly greater than it was in the years before the pandemic. There is a way to go before rental inflation (which accounts for about a third of the Consumer Price Index) is stamped out as the Fed must wish:

For a visualization of how this works in practice in a number of different locations around the US, check out this Odd Lots post, which includes plenty of charts put together with the Bloomberg ECAN function.

If all this sounds bad, Bespoke Investment Group suggests that the suddenness of the way the NAHB’s index has fallen is unprecedented:

While the actual level of homebuilder sentiment has yet to reach historical extremes, the intensity and consistency of the recent declines have. For starters, the six-month rate of change has seen one of the most extreme plunges in the history of the survey (going back to 1985). The only time sentiment deteriorated at a faster rate was in the initial months of the Covid crash. Even during the financial crisis, there wasn't a six-month period where sentiment fell as fast as it has in the last six months.