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The Outlook for the Housing Market

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As the housing market gears up for its busy season, it seems that homebuyers are facing familiar challenges: high prices and rising mortgage rates. The benchmark for mortgage rates, the 10-year Treasury yield, reached 4.163% on Monday, marking the largest two-day gain since June 2022. This increase follows strong jobs and ISM price data, indicating that the anticipated rate cuts from the Federal Reserve may be delayed.

The surge in Treasury yields has pushed mortgage rates above 7% for the first time since mid-December. According to Mortgage News Daily’s survey, the 30-year fixed mortgage rate stood at 7.04% at midday on Monday.

Prospective buyers have experienced significant fluctuations in mortgage rates over the years. In early 2021, the 30-year fixed rate hit a historic low of 2.65%. However, rates gradually rose to reach a peak of 7.79% in late October 2023. Last week, Freddie Mac’s weekly measure of mortgage rates was at 6.63%, but with the recent increase in Treasury yields, it is expected to climb higher this week.

With rates on the rise and home prices still elevated, prospective buyers may face added pressure as the busy spring season approaches. According to Redfin, the median home sold for $361,245 in the four weeks ending January 28, reflecting a 5.5% increase compared to the previous year.

Housing Costs and the Federal Reserve: A Closer Look

Four Democratic U.S. senators recently penned an open letter regarding housing costs, directed at Federal Reserve chair Jerome Powell. Elizabeth Warren, John Hickenlooper, Jacky Rosen, and Sheldon Whitehouse expressed concern over the country’s ongoing housing access and affordability crisis in relation to high interest rates. They urged Powell to carefully consider the impact of interest rate decisions on the housing market and called for a reversal of rate hikes that have rendered affordable housing out of reach for many individuals.

However, Powell clarified that the Federal Reserve’s primary objectives are maximum employment and price stability during a recent post-Federal Open Market Committee meeting press conference. He emphasized that the Fed’s focus does not extend to targeting housing price inflation or addressing the cost of housing. Powell firmly stated that these issues lie beyond the scope of the central bank’s responsibilities.

Contrary to previous expectations by futures traders, Powell announced that the FOMC is unlikely to implement rate cuts in March. The latest projections from the CME FedWatch tool indicate that futures markets are now pricing in five 0.25% rate cuts for 2024, down from six anticipated last month.

Powell acknowledged that the Federal Reserve is fully aware of how rate hikes and cuts impact the housing market. He further noted that there are inherent long-term challenges related to housing availability, emphasizing the insufficient construction of housing units. Unfortunately, addressing these concerns falls outside the control of the central bank.

In conclusion, while the senators’ letter highlights the pressing issue of housing costs, Powell has made it clear that such matters do not fall under the Federal Reserve’s purview, which primarily focuses on employment and price stability. Despite acknowledging the impact of interest rates on the housing market, Powell stressed that the central bank lacks tools to directly tackle housing affordability and availability concerns. Therefore, finding viable solutions to these housing challenges necessitates comprehensive efforts beyond the scope of monetary policy.

Builder Stocks Facing Challenges

Builder stocks in the US home construction industry experienced a dip on Monday. The iShares U.S. Home Construction exchange-traded fund (ETF) saw a decline of 1.1% during the afternoon session. Despite a strong upward trend in the final months of 2023, builder stocks are now struggling. Year to date, the ETF has lost 0.8% compared to the S&P 500’s gain of 3.8%.

This downward turn may be attributed to changing expectations regarding Fed rate cuts. Experts predict that rising mortgage rates and the subsequent impact on the housing market could be causing this decline in builder stocks.

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