Three housing sector groups write an open letter to the Fed

by Zain Jaffer

Last October 2023, three major housing industry groups, the Mortgage Bankers Association (MBA), the National Association of REALTORS® (NAR), and the National Association of Home Builders (NAHB) wrote an open letter to the Fed because of the rate increases that have resulted in record mortgage rates for homebuyers and more expensive debt for developers. The three groups said that housing affordability and the real estate market has been impacted by a “dramatic pullback in both mortgage origination and home sale volume.”

According to MBA’s data, mortgage rates are now at a 23-year high, resulting in the lowest number of applicants since 1996. In their own words, “the speed and magnitude of these rate increases, and resulting dislocation in our industry, is painful and unprecedented in the absence of larger economic turmoil.”

The three groups pointed out the spread (or difference) between the thirty-year mortgage rates and the ten-year Treasury yield is at “historically high levels, signaling deep-seated uncertainty about where the Fed is headed.”

What does this mean? It means that homebuyers are paying mortgage rates that are at least 120 basis points higher than these were previously. As of early November 2023, these averaged around 8% annually for the thirty year mortgage loan. They translate this as an extra $245 monthly for a standard $300,000 mortgage. The groups say this increases the chances and magnitude of a recession.

In the August CPI report, consumer prices were up 3.7%, while shelter costs were up 7.3%, which caused 90% of consumer price gains. According to the three, “the most effective approach to tame shelter costs, and assist on the broader inflation fight, is to facilitate the construction of attainable, affordable housing.” The large spread (or difference) between mortgage rates and the thirty year US treasury yield and the increase in interest rates is “limiting lot development and home construction, exacerbating housing supply, and pricing out millions of households from the goal of homeownership.”

The three groups urged the Fed to make two clear statements to the market. One, the Fed will not contemplate further rate hikes. Two, Fed will not sell off any of its MBS holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized.

They feel that these two statements will provide the market greater clarity about the Fed’s rate path and its plans for the MBS portfolio and reduce volatility for traders and investors. According to the NAHB, housing accounts for around 16% of US GDP

As an investor in this industry, I feel that this open letter needs to be acted upon by the Fed. However, as the Fed is really intent on slowing down the economy, unfortunately causing pain for many Americans seems to be part of the plan. In his early November address, Fed Chairman Jerome Powell did pause on further hikes for the month, but has not made a commitment to stop further hikes, or to lower until price stability is achieved and inflation tops at 2%.

Let’s hope that America’s housing market doesn’t crash despite this appeal. Too many jobs and people depend on this industry for their livelihood. It’s really gone beyond just inconvenience and belt tightening. Literally this industry is gasping its last breath.