With mortgage rates at a 23-year high and mortgage application activity down to its lowest level since 1996, NAHB, the Mortgage Bankers Association (MBA) and National Association of REALTORS® (NAR) are calling on the Federal Reserve to signal its intent that it will not raise interest rates further.
On Oct. 9, the three housing and banking groups sent a joint letter to the Board of Governors of the Federal Reserve to convey profound concern that ongoing market uncertainty about the Fed’s rate path is contributing to recent interest rate hikes and volatility.
“This has exacerbated housing affordability and created additional disruptions for a real estate market that is already straining to adjust to a dramatic pullback in both mortgage origination and home sale volume,” the letter stated. “These market challenges occur amidst a historic shortage of attainable housing.”
Today, the spread between 30-year mortgage rates and the 10-year Treasury yield is at historically high levels, and the difference between the current spread and the long-run average indicates mortgage rates for home buyers across the country are at least 120 basis points higher than they otherwise would be. In other words, the uncertainty-induced mortgage-to-Treasury spread is costing today’s home buyers an extra $245 in monthly payment on a standard $300,000 mortgage.
The organizations stated that the leading source of inflation in recent months has been increases in shelter costs. In the August Consumer Price Index report, consumer prices were up 3.7%, while shelter costs were up 7.3%. In July, shelter inflation was responsible for 90% of the gain for consumer prices.
“The most effective approach to tame shelter costs, and assist on the broader inflation fight, is to facilitate the construction of attainable, affordable housing,” the letter said. “Sustained wide spreads or further increases in interest rates make this economic goal more challenging by limiting lot development and home construction, exacerbating housing supply, and pricing out millions of households from the goal of homeownership.”
NAHB, MBA and NAR urged the Fed to make two clear statements to the market:
- The Fed does not contemplate further rate hikes; and
- The Fed will not sell off any of its mortgage-backed securities holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized.
Meanwhile, a top Fed official indicated that he agrees with the need to hold the line on interest rate hikes, stating that rates are now high enough to achieve the central bank’s goal to lower inflation to 2%. Speaking on Bloomberg Television today at the annual convention of the American Bankers Association, Federal Reserve Bank of Atlanta President Raphael Bostic said: “I think that our policy rate is at a sufficiently restrictive position to get inflation down to 2%. I actually don’t think we need to increase rates anymore.”