Will the Fed Rate Hike Trigger a Housing Market Recession?


  • The Fed rate hike was issued on Wednesday, climbing 75 basis to a new target rate 3.25% to 3.5%.
  • It’s the Fed’s third outsized hike in a row, as it looks to cool inflation (which came in hotter than expected last week).
  • Mortgage rates hit their highest level since October 2008 this week and will likely continue higher with the latest Fed rate hike.
Fed rate hike - Will the Fed Rate Hike Trigger a Housing Market Recession?

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The Federal Reserve is willing to do almost anything to defeat inflation, even if that means short-term pain. Its latest move? Investors expected a rate hike on Wednesday afternoon and the Fed delivered with a 75 basis point increase.

The Federal Funds rate now stands at 3% to 3.25% and the higher rates go, the more impact it’s having on various markets. The rising-rate environment has not treated the stock market all that well, with all four indices down by 15% or more so far on the year. It’s sent the U.S. dollar rocketing higher, along with mortgage rates.

Earlier this week, 30-year mortgage rates hit 6.25%, its highest reading since October 2008. That’s a bit ominous, as investors fear what a continual rising-rate environment will mean for mortgage rates.

The housing market underwent a stellar rise shortly after the Covid-19 selloff in the first quarter of 2020. However, as mortgage rates rise along with inflation, most markets in the U.S. are seeing a slowdown as well.

As the Fed continues to raise rates, mortgage rates continue to climb. Are we set for a housing market crash?

What the Fed Rate Hike Means for Housing

According to Ruben Gonzalez, Chief Economist at Keller Williams: “Housing made the second largest contribution to the 12-month increases in the index behind energy. As energy prices fall, housing will remain a key contributor to inflation.”

He added that: “We expect existing home sales to finish the year down nearly 20 percent, and for the slower pace of home sales to persist into the beginning of 2023.”

The Federal Reserve isn’t out just to tamper down inflation or to curb it; the Fed wants to crush inflation. With a historically low unemployment rate, the Fed seems willing to risk the stock market, the housing market and volatility in other asset prices to get inflation under control.

In the words of Jan Szilagyi, co-founder and CEO of Toggle AI: “They [the Fed] have a brief window to act aggressively, and they seem eager to use it.

During the Fed’s press conference, chairman Jerome Powell even acknowledged that the housing market needs to cool off and go through a correction.

That said, a housing “crash” like we saw in 2008-2009 doesn’t seem as likely. During the credit crisis, there were serious issues with the quality of loans that banks were issuing. Further, there were far fewer restrictions and capital regulations for banks than there are now.

What we have now isn’t quite the same — particularly with a strong labor market in tow.

The housing market from a price perspective ran too hot and now we face a Fed with tightening monetary policy. While that will likely lead to a housing correction — or “housing recession” — it seems unlikely to lead to a crash.

At least at the moment.

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2022/09/will-the-fed-rate-hike-trigger-a-housing-market-recession/.

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