A renowned economist cautioned on Monday that the US housing market is in the midst of a “deep recession,” which might put pressure on the Federal Reserve to ease off on interest rate rises.

According to the National Association of Home Builders, homebuilder confidence fell for the ninth consecutive month in September as rising mortgage rates and high prices drove many buyers out of the market.

When the early days of the COVID-19 epidemic were excluded, builder confidence plummeted to its lowest level since 2014.

According to Pantheon Macroeconomics senior economist Ian Shepherdson, the protracted drop in confidence indicates that the housing market has been “in a spiral for the whole year.”

“Activity mirrors mortgage applications with a lag, and the early September statistics are dismal, even before the full impact of the recent rate bounce filters through,” Shepherdson said in a client note on Monday.

“In sum, the housing market is in a profound slump, which is already wreaking havoc on homebuilders and will eventually impact housing-related retail sales,” he warned.
The monthly decrease in the NAHB index in September was worse than projected, and it corresponded with a rise in mortgage rates. For the first time since the housing market crashed in 2008 during the Great Recession, the average 30-year mortgage rate surpassed 6%.

Mortgage rates have risen as the Fed continues its string of rate rises aimed at taming decades-long inflation.

Following their meeting this week, central bank policymakers are anticipated to adopt another larger-than-normal boost of three-quarters of a percentage point, or 75 basis points, with some experts predicting an unprecedented full-point hike. A basis point is one hundredth of a percentage point.

However, Shepherdson believes that disturbing indicators in the housing market may force the Fed to reconsider its strategy.

“However, the longer and deeper the housing crisis persists, the greater the pressure on the Fed to slow the rate of tightening,” he said.

“Markets presently price in an 80% possibility of another 75 (basis point) raise in November, but we believe 50bp is far more plausible,” he said.

According to The Washington Post, a slowdown in purchasing activity is already causing house price drops in some markets, with the most severe drops coming in places that got “overheated” during the COVID-19 epidemic.

The prolonged housing slump “shows no indications of abating,” according to Robert Dietz, chief economist for the National Association of Home Builders.
“In this depressed market,” Dietz noted, “more than half of the builders in our study reported employing incentives to boost sales, such as mortgage rate buydowns, free amenities, and price reductions.”

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