What Does the Fed Action Mean for US Housing?


Since the previous major global recession was caused by disruptions in the housing market, it is understandable that many retailers are paying close attention to what is happening there. The effects of the sub-quality crash are still being felt today. The Fed is still in the business of mortgage-backed securities (MBS).

And while it’s the largest, the U.S. isn’t the only housing market facing pressure. China, Australia and New Zealand even have a monetary policy driven by housing conditions. House prices in Europe are a growing concern, although they have not yet reached the level of the ECB.

What’s at stake

Whether or not there is a reason to worry about a bursting bubble in housing is yet another important factor to consider: housing accounts for the bulk of commodity consumption. Housing prices are extremely sensitive to interest rate policy. And housing makes up the bulk of household wealth.

While interest rates are rising, so are mortgage rates. In fact, U.S. mortgage rates are the highest they have been since the subprime crisis. The higher cost of borrowing means that potential homeowners have to take out ever larger loans to finance the same house prices. Ultimately, this would put pressure on people to look for low-cost housing and lower rates for housing. In turn, this could reduce their wealth.

There is a growing problem

As the cost of borrowing money has risen in recent months, more homeowners are turning to a riskier option for getting loans: Exchange rate mortgages. ARMs accounted for as much as 17% of new mortgages in April, almost doubling over the previous year. Rising interest rates are not so much a problem for people with fixed loans. But with adjusted rates, a significant increase in rates could make the loan inaccessible.

Domestic equality represents an important source of voluntary spending. But loan refinancing has fallen by 71% over the past year, meanwhile mortgage applications fell 8.3%. And this is the middle of what is usually the busiest season for shoppers.

What to pay attention to

Of course, demand still remains, and despite lower sales numbers, people are still buying. But the market is starting to slow down, which has translated into builders looking to save capital while dealing with record prices of raw materials. That’s bad news for goods. If house prices were to turn around and start falling, there would be less money to continue to support the economy.

New home sales in May are expected to show a 1% drop compared to -16.6% in April. At the same time, Michigan Consumer sentiment is expected to be confirmed at 50.2, the worst recorded.

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