Housing Economists: Fed Policy Now Hurting Real Estate

The Federal Reserve’s continual interest rate hikes are freezing lending activity, which undermines efforts to build homes and relieve inventory, says NAR’s Lawrence Yun and NAHB’s Robert Dietz.

National Association of REALTORS® Chief Economist Lawrence Yun called the Federal Reserve’s latest interest rate hike a “disappointment” and said its monetary policy is now hurting the economy. Yun’s comments at the Residential Economic & Trends Forum during the REALTORS® Legislative Meetings in Washington, D.C., were echoed by Robert Dietz, chief economist for the National Association of Home Builders, who also spoke at the forum.

Consumer price inflation had been moving in the right direction—down—for months before the Fed’s hike last week. So, it wasn’t necessary for the Fed to raise rates again, and its monetary policy is making it difficult for some 4,000 small and regional banks around the country to lend cash, Yun said. “Regional banks have to offer higher interest yields to attract depositors,” he added. “Regional banks are an important source of loans—but they’re frozen. They’re shuffling their balance sheets and figuring out what to do.”

Home Front 2023

Loans to developers, too, have been tightening, which is causing consternation in the construction industry, Dietz said. “By raising interest rates, the Fed has made it more expensive to build housing,” he added.

Dietz said the real threat to the housing market is low inventory, and no changes in interest rates will solve that problem. He noted that while inflation in many economic sectors is falling, “shelter inflation” is still rising because of limited housing options on the market. “Homebuilding is the policy we need to bring that inflation down, not interest rate hikes,” he said. “We need to be building more than 1.1 million homes a year to have a meaningful impact on the lack of inventory.”

Home sales are almost at the level they were during COVID-19 lockdowns in 2020, and “we are nowhere close to pre-CVOID conditions yet,” Yun said. Current inventory is 40% lower than in 2019, but new-home sales are a bright spot, roaring back to pre-pandemic levels, he added. Bidding wars are returning with low inventory, which means recent dips in home prices may be short-lived.

A “lack of lots, labor and lending” continues to weigh on home builders, though an upswing in construction is expected later this year, Dietz said. The labor shortage is one of the biggest obstacles: The country is short about 400,000 construction workers, Dietz added. “A long-term labor shortage will be with us for the next 10 years. We need to recruit, train and retain workers in the field.”