Fed Holds Rates Steady as Housing Activity Softens

Key Takeaways:

• The Federal Open Market Committee (FOMC) held the federal funds rate at its current target range of 5.25-5.5 percent at its September 19-20 meeting. In the new Summary of Economic Projections (SEP), the median FOMC participant continues to expect one more 25-basis point rate hike by the end of 2023 and the median projection for the federal funds rate at the end of 2024 and 2025 were each revised upward by 50 basis points compared to the June meeting, to 4.6 percent and 3.4 percent, respectively, indicating a higher-for-longer policy stance. The SEP also included modest downward revisions to the committee’s inflation expectations and unemployment rate forecast, while economic growth expectations were revised upward, consistent with an expectation for a soft landing.
• Existing home sales declined 0.7 percent to a seasonally adjusted annualized rate (SAAR) of 4.04 million in August, according to the National Association of REALTORS® (NAR). The number of homes available on the market declined 0.9 percent to 1.10 million, while the months’ supply held steady at 3.3. Compared to a year ago, the NAR’s median sales price of existing homes, which does not adjust for the mix of homes sold, rose 3.7 percent, its second consecutive positive reading on an annual basis, according to the NAR.
• Housing starts dropped 11.3 percent to a SAAR of 1.28 million, the lowest level since the onset of the pandemic in 2020, according to the Census Bureau. The magnitude of the decline was due primarily to a 26.3 percent drop in multifamily starts to a SAAR of 342,000, though single-family starts were also down 4.3 percent to a SAAR of 941,000. Single-family permits rose 2.0 percent to a SAAR of 949,000, while multifamily permits jumped 15.8 percent to a SAAR of 594,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined by 5 points in September to 45 following a 6-point decline the month prior, bringing the index to its lowest level since April. The indices for single-family sales in the present and single-family sales in the next six months each declined 6 points to 51 and 49, respectively. The index for foot traffic of prospective buyers was down 5 points to 30.

Forecast Impact:

The Fed held rates steady in line with market expectations, including our own. While the dot plot has one more rate hike penciled in for this year, we think the labor market will continue to loosen sufficiently for core inflationary pressures to ease enough to dissuade such a move. If, however, the economy and labor market remain stronger than we anticipate and conditions unfold closer to the more upbeat FOMC’s forecast, another rate hike and a continued higher-for-longer policy stance would be likely.

Existing home sales remained near recessionary levels in August, in line with our forecast. The effects of the return to greater than 7-percent mortgage rates will likely not be felt in full until September or even October given the lag between when rates are locked in and home sales are completed, but we continue to believe the downside risk to sales is limited given a heightened share of current sales are already likely coming from less interest-rate-sensitive buyers who are either purchasing in cash or are moving due to life circumstances rather than discretionary reasons. On the new construction side, single-family starts came in mostly in line with our expectations for a convergence between the previously deviating starts and permits series (the two series are now similar in August). Moving forward, with higher mortgage rates and a further decline in homebuilder confidence in September, we expect some additional softening. The bigger story is likely the collapse in multifamily starts. While the magnitude of the drop-off in multifamily starts was somewhat surprising, the direction was not, given that permits have generally trended downward since the summer of 2022. However, we note that the multifamily series are notoriously volatile and the significant decline in starts was coupled with a jump in multifamily permits, though both are now trending downward and we expect ongoing weakness.

Nathaniel Drake
Economic and Strategic Research Group
September 22, 2023

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