The US housing market is in the midst of a “deep recession” that could put pressure on the Federal Reserve to ease up on interest rate hikes, a prominent economist warned on Monday.
Home builder confidence declined for the ninth straight month in September as surging mortgage rates and steep prices priced many buyers out of the market, according to the National Association of Home Builders.
Builder confidence fell to its lowest level since 2014 when excluding the early days of the COVID-19 pandemic, the index showed.
The prolonged downturn in confidence shows the housing market has been “in a tailspin for the whole of this year,” according to Pantheon Macroeconomics Chief Economist Ian Shepherdson.
“Activity tracks mortgage applications with a lag, and the early September numbers are grim, even before the full hit from the rebound in mortgage rates in recent weeks works through,” Shepherdson said in a note to clients on Monday.
“In short, the housing market is in a deep recession, which is already hammering homebuilders and will soon depress housing-related retail sales,” he added.
The NAHB index’s monthly decline in September was more severe than analysts expected and coincided with a spike in mortgage rates. The average 30-year mortgage rate topped 6% for the first time since the housing market imploded in 2008 during the Great Recession.
Mortgage rates have spiked as the Fed moves forward with a series of rate hikes aimed at tamping down decades-high inflation.
Central bank officials are expected to implement another larger-than-normal hike of three quarters of a percentage point, or 75 basis points, following their meeting with this week, with some analysts suggesting an unprecedented full-point hike could be in store. A basis point is 1/100th of a percentage point.
But troubling signs in the housing market could lead the Fed to rethink its plan, according to Shepherdson.
“The longer and deeper the housing recession becomes, though, the greater the pressure it will exert on the Fed to dial back the pace of tightening,” he wrote.
“Markets currently price-in an 80% of chance of another 75 (basis point) hike in November, but we think 50bp is much more likely, and the parlous state of the housing market is a key factor in our forecast,” he added.
As The Post has reported, a slowdown in buying activity is already resulting in home price cuts in some markets, with the most severe declines occurring in areas that became “overheated” during the COVID-19 pandemic.
Robert Dietz, chief economist for the National Association of Home Builders, said the ongoing housing recession “shows no signs of abating.”
“In this soft market, more than half of the builders in our survey reported using incentives to bolster sales, including mortgage rate buydowns, free amenities and price reductions,” Dietz said.