US housing market cools as Fed actions drive mortgage rates higher

This shows new construction in April of an affordable housing and mixed-income community in Miami's Allapattah neighborhood.

This shows new construction in April of an affordable housing and mixed-income community in Miami’s Allapattah neighborhood.

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Few industries are as sensitive to changes in interest rates as housing.

As borrowing costs increase, purchasing power decreases. This creates a drag on home prices accelerating, which may encourage more homeowners to put their homes on the market for sale in hopes of cashing in before prices fall.

Housing supply is rising as demand falls, threatening a pernicious cycle for what is often Americans’ biggest investment.

This is one of the worries as the Federal Reserve continues to fight inflation. The central bank needs to raise its target short-term interest rate in hopes of cooling pandemic-induced higher prices. Mortgage rates jumped as a result. The average 30-year mortgage interest rate has almost doubled over the past year. This adds about $600 per month to the cost of borrowing to buy an existing home at the median price.

Investors will get a glimpse of three important gauges in the housing market this week.

The National Association of Home Builders’ August index will be released on Monday. Homebuilders are asked about their views on the single-family home market now and in the next six months. Both have deteriorated.

On Tuesday, July’s statistics on new home starts are due. Construction of single-family homes is slowing due to higher borrowing costs, more expensive building materials and rising labor costs. Homebuilder stocks have been among the worst performers this year for investors.

And the two biggest home improvement retailers, Home Depot and Lowe’s, will announce their latest quarterly results on Tuesday and Wednesday. Their businesses exploded when people stayed home to avoid COVID-19 and spent money remodeling their homes and home offices.

This buying spree has slowed down. Stores have experienced supply chain issues and inflationary pressures such as double-digit increases in wholesale prices for major appliances like refrigerators and washing machines. This reduces profit margins as stores are careful about how much of these higher costs to pass on to shoppers. (Full disclosure: I’ve owned Home Depot stock for over a decade.)

The Fed is not about to suspend interest rate hikes if the housing market shows signs of slowing. It’s unlikely to blink even if house prices start to drop, at least a little. A calmer housing market will help improve the outlook for inflation, even if it undermines economic confidence.

Tom Hudson hosts “The Sunshine Economy” on WLRN-FM, where he is vice president of news. Twitter: @HudsonsView

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