Rising mortgage costs dampen home sales as Fed raises interest rates

Signs of a struggling economy persist. And the level of interest rates and what that means for the nation remains difficult to predict.

Estimates of this quarter’s gross domestic product, the measure of the country’s economic activity, fall at 0.3% after the housing news this week. A falling GDP can signal a shrinking economy or signs of a recession.

Additionally, the Dow Jones Industrial Average, which fell 9% last month, fell 1,200 points last week with news that inflation remained high.

“It’s pretty obvious the Fed needs to do more. How much will it finally be enough? It’s a million dollar question. It’s very uncertain at this point.” Daniil Manaenkovan economist from the University of Michigan, told Bridge Michigan.

“It’s not out of the question that the Fed will have to raise rates much higher than what markets currently expect.”

In March, the Fed raised rates by a quarter of a percentage point to 0.5%, the first increase since 2018. The Fed raised rates by 0.5% in May before picking up the pace and proceeding to consecutive increases of 0.75% in June and July. . This month’s meeting was the first since then.

The rate hike maneuvers are part of an effort to slow the economy and bring inflation down to 2%. A goal that the Fed intends to achieve by 2025.

However, the consumer price index, the measure of inflation, increased by 0.1% in August, totaling 8.3 percent over the past year.

In August, officials warned that slowing inflation could accompany “some pains.And Fed Chairman Jerome Powell said on Wednesday the pain would come from a “weaker labor market”, higher interest rates and slower GDP growth.

The targeted slowdown will likely increase national unemployment by 15 percentage points, from 3.8% to 4.4% in 2023 and 2024. Michigan’s unemployment rate would likely rise from 4.2% to just over 4, 8%.

Reducing inflation could break a “vicious circle” that would slow the recovery, if inflation leads to faster wage increases, which in turn leads to more inflation, Manaenkov said.

At a press conference in Washington, DC, Powell said Americans are “really suffering from inflation” and watching their wage growth evaporate because of routine spending. Lowering it, he said, will again prepare the nation for a stronger job market.

“I wish there was a painless way to do this,” he said. “There are not any.”

While rate increases could reduce consumer spending, Manaenkov said business investment could alter financial projections but may not be significantly affected.

If a rise in interest rates signals an impending recession, Manaenkov said, that will affect business spending more than the rate itself.

Rising interest rates are clearly having an impact on the housing market, UM’s Manaenkov said, especially in house construction.

United States Census Bureau ofata published tuesday shows that residential building permits fell 10% in August compared to the previous month. And the seasonally adjusted rate of 1.5 million was 14.4% lower than August 2021 figures. Specifically, single-family permits fell 3.5% from July to August.

Meanwhile, existing home sales fell 0.4% in the United States in August, the seventh consecutive month of decline, according to the National Association of Realtors. Sales have fallen about 20% since August 2021, NAR said.

“The housing market is showing an immediate impact from monetary policy changes,” NAR chief economist Lawrence Yun said in a statement on Wednesday.

Mortgage rates jumped to 6% for a 30-year loan for borrowers with very good credit earlier this month. This week, that rate has risen to around 6.58%.

According to the Michigan Association of Realtors, home sales fell nearly 13% in July from a year earlier, but prices rose about 12% over the same period, averaging 273,661. $ so far this year. Michigan data was not available for August.

Dan Elsea, President of Real Estate One, said Bridge at the end of August that state realtors were expecting a slowdown based on fewer forecast projections that month.

Year-over-year national housing starts were flat, while completions rose 5%.

“Manufacturers started a ton of houses,” Manaenkov said. “And now these are piling up. … New construction is likely to decline further. And construction is exactly what contributes to gross domestic product.

In Michigan, homebuilding fell 10% in July and about 15% in August, said Bob Filka, CEO of the Home Builders Association of Michigan.

While that leaves builders unsettled, the state’s market for new construction is less based on speculative construction than in other parts of the country, Filka said. This means that any stock gluts that may arise in high-growth areas may not affect Michigan.

So far, he said, the state builders are “all still very busy,” although some people are canceling projects due to higher interest rates. An equally important problem in the residential construction industry is the lack of supply, which is also holding back construction.

“There’s always a demand,” he said of new homes in the state. “And there is still definitely a need.”