Housing supply

Comment: Lowering inflation will not help housing supply

By Conor Sen / Bloomberg review

Wednesday’s Federal Reserve meeting provides the clearest sign yet that the central bank is treating inflation as a national emergency, with markets expecting a 0.75% increase in interest rates. But the Fed’s policy actions come at a high cost, especially in the housing market.

With mortgage rates having crossed the 6% mark, the housing market is slowing down. And while this may be an acceptable short-term price to pay in the fight against inflation, it will create future supply chain issues once inflation is brought under control and we are ready to resume activity. .

The refinancing market gives a glimpse of what is to come. When mortgage rates are low, as they were from 2020 to early 2022, refinances increase as homeowners take advantage of lower rates to secure a smaller monthly payment and get cash out of their homes. This process generates economic activity and jobs for the people involved in the transaction – loan officers, appraisers and closing attorneys – even software companies like DocuSign, as anyone who has refinanced in the past two years can. bear witness.

But with mortgage rates north of 6%, refinancings have come to a screeching halt, down more than 80% from the peak of the pandemic and now at their lowest level in more than two decades.

This is leading to layoffs at companies operating in the mortgage industry, such as LoanDepot, because there simply isn’t enough work to do.

Unfortunately, layoffs are spreading more and more in the housing industry. Real estate brokerage Compass said on Tuesday it was laying off 10% of its staff, followed by Redfin Corp., another brokerage firm, also announcing job cuts.

There are many layers to this new market. Mortgage rates below 3% didn’t make sense in the inflation and growth environment we’ve seen over the past year, and it’s possible we won’t see rates that low again. So to the extent that the housing and refinance business needed rates below 3% to be viable, it’s normal for those jobs to disappear.

Moreover, it is true that inflation is too high and requires a policy response, and the housing market was unsustainable, with house prices and mortgage rates combining to create extreme affordability issues. So it makes sense to raise mortgage rates to help calm both inflation and the housing market.

The concern arises when we realize that there is a surge of tens of millions of millennials looking to buy homes over the next decade. The housing market needs many more homes to be built to meet this demand. If we are already restricting economic activity so much that it is causing job losses, it will be more difficult to restart the machine once inflation is brought under control.

Laid-off loan officers could get new jobs in banks or other sectors, and even if mortgage rates fall back to 4% in 2023, it will take time for lenders to ramp up staff to meet demand. This will keep mortgage rates higher than they otherwise would be, dampening the housing market stimulus that policymakers may seek once inflation is brought under control.

And so are other parts of the industry that are currently weighing staffing levels in the face of declining demand. We have seen how many goods must be purchased to build a house: wood, paint, windows, garage doors, appliances, etc. The same goes for the labor needed to build and complete the transactions between buyers and sellers.

Right now, inflation is arguably the first, second, and third economic priorities of the White House, Congress, the Federal Reserve, and the general public. If housing market activity in the summer of 2022 is a casualty along the way, so be it. But while higher mortgage rates and less panic buying might help ease short-term imbalances, it does nothing to address the longer-term need for more homes. Which means that this current market cooling will likely make things worse in the future.

Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have an interest in the areas he writes about.