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Why the Fed must address record-high home prices

Federal Reserve must target home prices to reduce inflation
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The housing market is stuck in the mud between homeowners locked in at historic-low mortgage rates and inventory that is now 40% lower than pre-pandemic norms.

Homeowners who secured a refinance or first mortgage in 2021-2022 at or near three percent are unlikely to sell their home (even for a profit) knowing if they purchased a home their mortgage rate would be double the rate they presently enjoy. Today, the average 30-year fixed-rate mortgage is 7.09%- the highest average rate seen in over twenty years.

A Logjam of Inventory

Consequently, housing inventory sits at a 3.3-month supply- well below the six-month inventory that is found in a healthy housing market with moderate home appreciation. This shortage is propping up home prices despite record-high housing unaffordability and rising interest rates.

Stalled home prices have also made the Federal Reserve’s task of reducing inflation much more difficult. In fact, housing and shelter costs account for one-third of the basket of goods and services that the Bureau of Labor and Statistics uses to calculate the Headline Consumer Price Index. The impact is even greater in the CORE CPI which excludes more volatile elements such as food and energy. 40% of the overall Core CPI index consists of shelter or housing costs. The longer home prices remain stuck the more likely the Fed will likely continue to increase interest rates to combat inflation.

Will the Fed Pivot in 2024?

The housing market could see a flood of buyers and sellers next year should the Federal Reserve decide to reverse course and lower rates. This could significantly reduce median home prices in several key markets. It could also simultaneously erase the Fed’s year-long efforts to reduce inflation. Such a pivot in policy is a risky proposition- one many economists find unlikely.

Is a pivot likely? To answer that question we look to Fed Chairman Jerome Powell’s comments in Jackson Hole last week at an economic policy symposium.

“Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

Why the housing market is a likely target of the Fed

Presently the Fed’s efforts to cool inflation are being frustrated by a surprisingly strong GDP (gross domestic product) and consumer spending. However, a more persistent problem is home prices that remain frozen at record highs. In order to bring inflation down to the Fed’s target rate, increasing pressure must be applied to the housing market and ultimately, home prices. In other words, the housing market could be the Fed’s intended casualty to tame inflation.

“In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy”, said Fed Chairman Jerome Powell at the Jackson Hole symposium.

Next Steps

Reverse mortgage professionals will want to closely monitor home prices and inventory in their markets either by working with an experienced local real estate professional or by utilizing SnapForce CRM (watch video of Snapforce in action) which provides updated housing data each month for median home prices, affordability, inventory, and several other key metrics.

-Shannon Hicks

Resources:

Inflation: Progress and the Path Ahead
Fed Chairman Jerome Powell’s speech to the Jackson Hole Symposium (August 25, 2023)

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Editor in Chief: HECMWorld.com
 
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
 
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
 
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.

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1 Comment

  1. Five years ago, who predicted this would happen or the financial devastation caused by COVID-19 for that matter?

    Are we seeing transitory inflation as the current Administration once named it? Could we be heading into something worse? Even the inversion of the 2 year and 10 year interest rates (a reasonably reliable indicator in the past of coming recession) and the increase in that inversion has not been all that useful to economists in analyzing current economic conditions and trends.

    In the past in similar housing situations, we would hear advisors telling homeowners to sell their homes, rent, and then take advantage of much lower prices in the near future; many times that was sage advice. Has any major adviser recommended that strategy currently? Many wonder if in some areas, home prices will remain high until mortgage interest rates substantially drop, thus justifying the higher home prices at that time.

    As long as there is this level of uncertainty in both home prices and mortgage interest rates, expect reverse mortgages to do as poorly as they have for the last five years (and more). I am of the school that believes that lower upfront MIP will do little to drive HECM origination. What is needed is a substantial rise in HECM PLFs and a reduction to the PLF expected rate floor. With the size of the reserve in the MMIF for HECMs, it seems the inaction of FHA in regard to raising HECM PLFs is tantamount to saying they are indifferent to more seniors being helped by the HECM program.

    While many praise the “safeguards” FHA has added to the HECM program (particularly during fiscal years 2011 through 2015) as improving the HECM program, I condemn several of them as being too harsh on new business for the sake of an incremental reduction in the risk of doing that business. I still question why the drastic changes to both the HECM PLFs and the expected rate/PLF floor were necessary on 10/2/2017; as to the changes to MIP on that date, few even acknowledge the substantial reduction in the second largest cost to most borrowers, ongoing MIP, by dropping that rate from 1.25% back to its historic 0.5%.


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