The Fed could crash the housing market PlatoBlockchain Data Intelligence. Vertical Search. Ai.

The Fed could crash the housing market

By Nicole Goodkind, CNN Business

Investors are getting spooked that the Federal Reserve’s aggressive interest rate hikes could damage the US economy (just look at Tuesday’s selloff).

One area of growing concern: housing. Interest rate hikes can lead to higher mortgage rates, which could cause people to think twice about buying a home.

So far, sales are slipping, while prices are holding steady. But some economists warn continued historic rate hikes by the Fed could risk crashing the housing market, underscoring the difficult task ahead for the central bank.

What’s happening: According to Tuesday’s Consumer Price Index report, housing costs rose 0.7% in August and are up 6.2% year-over-year, the largest increase since 1991.

That increase was largely responsible for August’s higher-than-expected pace of inflation. Combined with a tight labor market, those high prices give the Fed reason to continue to go hard at its policy meeting next week and beyond, Marvin Loh, senior strategist at State Street, told me.

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Role of the Federal Reserve

The Fed needs to see housing costs ease by about half a percentage point to reach its ultimate inflation goal, Loh added.

The job won’t be easy. Housing prices can remain stubbornly high, even as the Fed works to counteract them.

Housing prices are “the type of sticky inflation that will not ease anytime soon,” Joseph Brusuelas, chief economist at RSM US, told me. “It’s why the Fed will need to demonstrate a show of resolve by increasing the policy rate by 75 basis points at its September meeting despite the encouraging declines in transportation and energy.”

The risks: Some economists are noting weakness in the housing market starting to peek through. Home sales declined in July for the sixth month in a row. Housing starts, a measure of new home construction, also plunged that month as the cost of building supplies remained high and prospective buyers were priced out of the market.

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So should the Fed keep up its historic hikes?

The central bank must walk a careful line — a housing slowdown has preceded nine out of the past 12 recessions, and investors haven’t forgotten America’s catastrophic housing crisis in 2008.

Keep in mind: Although there are some reasons to suggest the CPI report on housing lags what’s actually going on in the market, and that housing prices could already be on their way down, we’re nowhere near a market collapse.

Still, Federal Reserve officials will face a tough decision in the coming months. Do they use the housing market’s resilience as a mandate to push forward with aggressive rate hikes and risk a crash?

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