Real Estate Crash

Investors are becoming increasingly concerned that the Federal Reserve's rapid interest rate hikes may harm the U.S. economy, as evidenced by Tuesday's events.

The issue of housing is becoming increasingly urgent. A rise in the interest rate could lead to a rise in the mortgage interest rate, which could cause prospective homebuyers to reconsider their decision.

Until now, sales have decreased while prices have remained unchanged. Other economists, however, are concerned that the Fed's sustained record rate hikes could put the housing market at risk of collapse, highlighting the central bank's daunting challenge ahead.

According to a report on the Consumer Price Index released on Tuesday, housing costs grew by 0.7% in August and are already up 6.2% year-over-year, which constitutes the largest annual increase since 1991.

This rise was a major factor in the August inflation rate being much higher than predicted. Marvin Loh, a senior strategist at State Street, told me that the Federal Reserve has cause to maintain its aggressive stance in its upcoming and future policy meetings. When combined with a tight labor market, these high prices provide the Fed cause to sustain its aggressive stance.

the role that the federal reserve system played

According to Loh, in order for the Fed to reach its long-term inflation target, home prices will need to decline by around 0.5 percentage points.

The work will in no way be simple. Despite the Federal Reserve's efforts to reduce them, house prices may be unable to decrease.

According to Joseph Brusuelas, chief economist of RSM US, home prices are "the type of sticky inflation that will not abate in the near future." This remark was made by Brusuelas to me. This is why the Federal Reserve will need to demonstrate its resolve by lifting the policy rate by 75 basis points at its September meeting. This is despite the encouraging declines in energy and transportation costs.

There is a growing consensus among economists that the housing market is showing indications of deterioration. In July, the number of residences sold decreased for the sixth consecutive month. As a result of the sustained high cost of building materials and the fact that prospective purchasers were priced out of the market, housing starts, a metric of new home construction, dropped considerably during that month.

so should the fed keep up its historic hikes?

Nine of the previous 12 recessions were preceded by a housing slowdown, and investors have not forgotten the 2008 housing crisis that devastated the United States. The central bank should proceed with caution in this area.

Keep in mind that despite signals that the CPI data on housing lags what is actually happening on the market and that home prices may already be falling, the market is nowhere near collapsing.

In the next months, Federal Reserve policymakers will have to make a difficult decision. Do they interpret the solid housing market as a mandate to proceed with aggressive rate hikes, thereby putting the economy at risk?