Powell remarks "good news" for housing market, suggests Fannie Mae chief economist
The resilience of the US labor market in the face of higher interest rates has been something of a surprise story throughout this year and 2023 – but the Federal Reserve is now indicating that a more balanced outlook is emerging.
Even despite a series of Fed rate hikes bringing the central bank’s key rate to its highest level in over two decades, the economy continued to operate at a rapid clip in the opening months of this year, adding jobs at a pace far beyond expectations.
That strength has started to fade amid a gradual rise in the national unemployment rate, and in remarks to congressional lawmakers on Tuesday (July 9) Fed chair Jerome Powell suggested the labor market had returned to something resembling its pre-pandemic appearance – “strong, but not overheated.”
Powell struck a balanced tone in Washington, giving no clear signal on when the Fed was likely to bring rates lower and underlining its intention to make decisions on a meeting-by-meeting basis.
Still, the Fed’s growing confidence on the economic outlook was a significant takeaway from Powell’s remarks, according to Fannie Mae senior vice president and chief economist Doug Duncan (pictured top).
He told Mortgage Professional America that clear signs of a more balanced economy were largely positive on the housing front. “I think the statement on the labor market being back to normal was perhaps the one piece of information to take away from [Powell’s testimony],” Duncan said.
“So that’s probably good news for housing in that the jobs market is really a key factor in thinking about where housing is going to go. If people have jobs and are comfortable of the security of those jobs and the income related to those jobs, that’s usually good for housing.”
Scott Valins from GoRascal noted a mixed sentiment among first-time buyers, with some proceeding despite high rates, while others adopt a wait-and-see approach.https://t.co/G262Eo9eEi#mortgagetrends #homesales #interestrates
— Mortgage Professional America Magazine (@MPAMagazineUS) July 5, 2024
Speculation continues to surround possible Fed rate cut timeline
As a segment of the economy that’s particularly sensitive to interest rates, much of the outlook for the US housing and mortgage market will depend on the Fed’s timeline for cutting rates – but while Powell signaled little chance of further hikes, it’s anybody’s guess as to when the first cut will arrive.
Fannie Mae currently expects a quarter-point reduction in December at the earliest, although Duncan stressed that could change between now and next week with the release of its next economic update.
Prospects for the housing market appear to be better this year than 2023, although there’s seemingly no prospect of a big upswing in activity. “We do believe that by the end of the year, when you compare full-year statistics in 2024 to full-year statistics in 2023, you’ll see a slightly higher level of new home sales [and] a slightly higher level of existing-home sales – but it’s not going to be a dramatic shift,” Duncan said.
“It’s going to be a gradual grind upwards over time, and stronger growth will wait for lower rates when the Fed gets comfortable that they’ve locked down inflation to their 2% target.”
What happens if the Fed doesn’t cut rates?
While many expectations earlier in the year centered around multiple rate cuts in 2024, the Fed has stayed the course in the year to date, with its intransigence leading some to speculate that it may leave rates entirely unchanged by the beginning of 2025.
The Fed’s latest so-called “dot plot,” which collects officials’ forecasts on various economic indicators, showed eight officials were expecting two cuts in 2024, with seven envisaging one cut and four anticipating no change.
Would the prospect of no Fed cuts be a worrying one? “I would want to understand the rationale for them not cutting,” Duncan said. “If the rationale… was simply that inflation hadn’t reached their 2% target, but the economy was still functioning well, then I wouldn’t see that as a cause for concern.
“But if the rationale for not cutting was solely focused on inflation at the risk of overall economic activity, then that would be some concern because if it started to see a run-up in unemployment that cuts into the demand side of the housing market, and certain could lead to lower house price appreciation or some depreciation in prices.”
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