Housing defies Fed campaign to control inflation

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The breakneck pace of U.S. house price increases accelerated further last month, making it even harder for the Federal Reserve to rein in the worst inflation in 40 years.

The seasonally adjusted median selling price of homes jumped 3.6% in April from March, with the biggest increase in Zillow data from 2012. Inventory is starting to rise slightly, but it’s still so low that it is largely exceeded by demand, fueling housing appreciation.

This is extremely frustrating for buyers faced with the combination of discouraging prices and soaring mortgage rates. Moreover, housing inertia – an important component of the indexes used to track inflation – means that consumer prices are likely to stay higher for longer. This will dare Fed Chairman Jerome Powell to raise interest rates even more aggressively. More and more, it seems not to end well.

Longtime stock and bond traders know it’s a wild ride to fight the Fed — to swim against the tide of tighter monetary policy — but that’s what the housing market is doing, even if stocks and bonds have fallen since the start of the year. If the pace of housing appreciation were to slow, it could allow for an orderly reset of the economy and the housing market — a “soft landing” in Fed parlance. But the housing market chooses the challenge instead.

The latest evidence of this is the renewed popularity of variable-rate mortgages, or ARMs, which offer lower initial rates than fixed-rate loans, but expose buyers to interest rate risk later in the loan term. . In the week ended May 6, ARMs increased to 10.8% of all mortgage applications, the highest percentage of total volume since March 2008.

Buyers are struggling to make the math work for their home purchases, so they’re asking their brokers to come up with creative ways to close deals. This is not about a systemic catastrophe brewing – ARM usage still represents a tiny fraction of volumes during the 2000s bubble – but instead of entering the final innings of this cycle real estate, these products help prolong the game.

Sustained demand combines with a near-record supply shortage that has no easy solution. Senior Economist Jeff Tucker of Zillow wrote earlier this month that inventory could take until September 2024 to return to 2019 levels. Homebuilders are racing to put homes on the market, but they face ongoing supply chain disruptions that make it difficult to obtain materials such as windows and garage doors, and their stock market investors are rebelling and driving stocks lower, fearing new inventory will hit the market just in time for a sharp decline.

All of this is a headache for the Fed, which has just started a cycle of raising interest rates. Markets are pinning a slim possibility that policymakers will need to raise the fed funds rate well above 3% to rein in the worst inflation since the 1970s, but a growing chorus of economists, including the former adviser to the Obama administration Jason Furman; Ken Rogoff, professor at Harvard University; and former Treasury Secretary Lawrence Summers thinks 3% may be too low and the rate may need to rise to 4% or higher.

Housing, of course, is not measured directly by major price indices and fuels inflation through rents and a category called equivalent owners’ rent, a measure based on studied estimates of what people think their homes would rent.

For this reason, housing market prices are feeding the consumer price index and the personal consumption expenditure index with a substantial lag, meaning that the current housing surge will be felt in the readings of inflation through 2023, according to a study by Marijn Bolhuis of the International Monetary Fund, Harvard University’s Judd Cramer and Summers, the former Treasury Secretary. “Even if house price increases were to stop, because we had seen such a run in house prices and because of the lagged structure of the CPI, there were already sharp increases in inflation at the future,” Cramer told me on Friday. “Not only has it not stalled, but it hasn’t really started to slow down yet by some private measures. »

There seems to be a widespread belief that house price increases will remain positive, even if, as expected, mortgage rates are dampening the number of transactions. The thought is that the large number of millennial homebuyers will provide a strong demand tailwind even after historic supply shortages begin to ease.

Granted, this could be the last burst of the boom before the pace of appreciation cools to a pace the Fed can tolerate. According to Jonathan Miller, president of appraiser Miller Samuel Inc., buyers may perceive the risk of even higher rates and rush to close deals ahead of time. “There is a tightening window of opportunity,” he told me. Spring is traditionally high season for real estate, and a warm summer could dampen some of the heat in house prices. But if it shows any signs of continuing, the market won’t appreciate what it’s unleashing: the higher it goes, the more the Fed will have to oppose it, risking a violent outcome for the entire economy.

More other writers at Bloomberg Opinion:

• A recession won’t be as scary as it looks: Allison Schrager

• A slowdown in the housing market will not improve affordability: Conor Sen

• The Fed must be aware of interest rates: Bill Dudley

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

More stories like this are available at bloomberg.com/opinion

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