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Fed’s rate hikes hammer housing affordability

The Federal Reserve has hit the brakes on the economy, so that they can slow inflation. Housing is where in fact the rubber meets the street,

Why it matters: Because the pandemic, the hot housing marketplace and associated boomlets in renovations and new construction have already been key contributors to the post-COVID economic recovery. That’s changing.

Driving the news headlines: The amount of newly started homes plunged in July.

  • Starts of single-family homes fell 10% from the last month, hitting their lowest point since June 2020 close to the depths of COVID-era uncertainty.

How it operates: Fed rate hikes have helped push mortgage rates sharply higher, making investing in a new home a lot more expensive.

  • The 30-year fixed mortgage rate, that was hovering around 3% last November, exploded to over 6% in June. (It’s since eased back again to around 5.2%.)
  • Since home prices are up over 30% during the last year or two, the surge in mortgage rates was an ideal cocktail for a collapse in affordability.
  • Actually, housing affordability as measured by an index made by the National Association of Realtors may be the lowest since 1989 .
  • Since fewer people can purchase a fresh house, homebuilders are making fewer.
Data: National Association of Realtors; Note: An index of 100 means the normal family has exactly enough income to be eligible for a home loan on the median-priced home; Chart: Axios Visuals

The picture as a whole: This may be considered a bad thing for economic growth and employment, but by slowing housing demand, the Fed hopes that house prices eventually begin to edge lower.

  • If that occurs it will take a few of the sting out of an integral way of measuring inflation the buyer Price Index that is heavily skewed toward housing costs.
  • But up to now there has been little sign of a slowdown in prices. Charges for existing homes almost all the homes sold were up 16% since year-end, by June.

What we and everybody else are watching: Home prices, obviously. And not simply on Zillow.

  • An update on existing home sales and prices arrives Thursday at 10am ET.

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