Fed Continues Aggressive Tightening Stance, and Housing Activity Slows Further in Face of Higher Rates

Key Takeaways:

• At its September 20-21 meeting, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate by 75 basis points to a range of 3-3.25 percent, the third consecutive 75-basis point hike and the highest target rate since 2008. In addition, the committee’s median projection for the federal funds rate by the end of 2022 is now 4.4 percent, 1 percentage point above their June estimate, and 4.6 percent by the end of 2023. The committee’s median estimate for the unemployment rate was revised upward through 2024, while the median GDP growth projection was revised downward over the same period. In his press conference, Chairman Powell reiterated the committee’s commitment to bringing inflation down and acknowledged that some economic pain would be required to do so, including higher unemployment and a possible “correction” in the housing market.
• The Conference Board Leading Economic Index® (LEI), a gauge of the economic outlook over the next three to six months, declined 0.3 percent in August to 116.2, its sixth consecutive monthly decline. Over the past six-month period, the LEI has declined 2.7 percent.
• Existing home sales declined 0.4 percent in August to a seasonally adjusted annualized rate (SAAR) of 4.8 million, according to the National Association of REALTORS®, the seventh consecutive monthly decline. The inventory of existing homes for sale declined 1.5 percent from its summer peak to 1.28 million, which is the same inventory level as in August 2021. The months’ supply was flat at 3.2. The median price of existing homes sold, which is not adjusted for home characteristics or location, declined for a second consecutive month and was up 7.6 percent compared to a year ago, the slowest annual growth rate since June 2020.
• Housing starts rose 12.2 percent in August to a SAAR of 1.58 million, the highest level since April, according to the Census Bureau. The strength was concentrated in the often-volatile multifamily starts category, which jumped 28.0 percent to a SAAR of 640,000, the highest level since 1986. Single-family starts increased 3.4 percent to a SAAR of 935,000. Single-family permits, however, declined 3.5 percent to a SAAR of 899,000, the lowest level since September 2019 when excluding the months around the initial COVID shock, and multifamily permits fell 17.9 percent to a SAAR of 618,000.
• The National Association of Home Builders/Wells Fargo Housing Market Index declined 3 points to 46 in September, marking the ninth consecutive monthly decline and the second month in a row below 50. The index for single-family sales in the present declined 3 points to 54, while the index for single-family sales in the next six months was down 1 point to 46. The traffic of prospective buyers index was also down 1 point to 31.

Forecast Impact:

The Fed raised interest rates in line with market expectations, and the updated Summary of Economic Projections (SEP) suggests a fourth 75-basis point hike in November and a 50-basis point hike in December to reach their year-end projected fed funds rate. This is above our most recent rate expectations, though we have long forecast that the Fed would need to tighten monetary policy aggressively to combat inflation and, in doing so, would likely cause the economy to fall into a recession in 2023. In fact, if the historical relationship between a rise in the unemployment rate and a recession holds true, the increase in the median projection of the unemployment rate in the SEP from 3.8 percent at the end of 2022 to 4.4 percent at the end of 2023 suggests the start of a recession. Historically, when the unemployment rate has risen by at least 0.5 percent over a twelve-month period, a recession has occurred. Our continued view of a recession beginning in the first quarter of 2023 is also consistent with another drop in the LEI.

The effects of tighter monetary policy are clearly being felt in housing, which continued to slow in August. Though housing starts moved up, this was largely due to the volatile multifamily series. Further, permits for both single-family and multifamily starts declined in August largely in line with our expectations. While we may modestly upgrade our Q3 starts forecast (primarily for multifamily) based on incoming data, the combination of falling permits and the ongoing decline in the homebuilder index suggest further declines in line with our current expectations. Similarly, the partial stabilization in existing sales keeps the current Q3 average somewhat above our near-term expectations, which may cause a small upward revision to our near-term forecast, but surging mortgage rates (at 6.29 percent, according to Freddie Mac’s most recent survey) will likely cause home sales to continue to fall in coming months.

Nathaniel Drake
Economic and Strategic Research Group
September 23, 2022

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