Painful Remedy: Fed Interest Rate Hikes Seem to Slow Workers’ Wage Gains and Calm Housing Markets | national news

July 5, 2022

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Rising interest rates are slowing the housing market as the Federal Reserve focuses on stunting workers’ wages in the fight against high inflation.

Higher rates are making mortgages more expensive and could push a faltering US economy into a recession after first-quarter GDP growth was -1.4%. They also come as tenants of apartments and rental homes face steep rent increases as well as continued inflation in other spending areas such as groceries and gas.

“The housing market is slowing down because you see the high rates having an effect. This should have an effect on house prices, perhaps even fast enough that prices don’t necessarily go down, but price increases flatten out. We see a decline in home sales, a decline in housing starts. We are seeing a slowdown,” Fed Chairman Jerome Powell said during a Senate Banking Committee hearing on Wednesday, June 27.

Federal Reserve Chairman Jerome Powell prepares his papers as he arrives before the Senate Banking, Housing, and Urban Affairs Committee, Monetary Policy Report on Capitol Hill, Wednesday, June 22, 2022, in Washington. (AP Photo/Manuel Balce Ceneta)

After dismissing last year’s inflation hike as transitory, the Fed has raised interest rates three times so far this year by a combined 150 basis points.

Powell, whose background is in private equity, stressed the need to limit workers’ wage gains, even if current inflation of 8.6% outpaces wage gains of 4.5% at the end of 2021. Employers have struggled to hire and retain workers throughout the pandemic. The central bank’s inflation objective is to slow wage growth. It worries lawmakers on both sides that rate hikes will lead to job cuts and a recession without reducing the high prices driven by other factors.

“I know higher interest rates are painful, but it’s the tool we have to moderate demand and restore the balance between supply and demand,” Powell said of the US economy facing high inflation, potential recession and central bank pressure against wage gains.

The Fed hopes to bring inflation back into the 2% range from its current rate of 8.6%, the highest since 1981.

Fiscal conservatives have also pressured Powell over large monetary and bipartisan fiscal injections into the economy during the pandemic. US Senator John Kennedy, R-Louisiana, said the federal government had spent an additional $7 trillion on pandemic relief and the Fed’s balance sheet of assets and liabilities fell from $1.5 trillion. dollars to $9 trillion, Kennedy said.

“We pumped all that money into the economy,” Kennedy said during the June 22 hearing.

End of the real estate frenzy

Rate hikes by the US central bank pushed mortgage interest rates from the 3% range to 6%. That’s chilling a housing market that posted robust and at times record levels of sales and price increases during the early stages of the coronavirus pandemic.

It was one of many dichotomies during the pandemic with property investors and wealthy property owners building even more equity and profits while restaurants, bars and other low-wage service workers lost their jobs and their salary.

Now the real estate market is cooling with rising mortgage costs with higher US central bank rates

“The average monthly mortgage payment has increased by more than 40% since the end of last year, due to rising mortgage rates and rising house prices. This affordability shock is pushing many potential buyers out of the market as it has become increasingly difficult to qualify for a mortgage,” said Ali Wolf, chief economist at California-based real estate research firm Zonda.

Mortgage rates

A sign indicating a reduced sale price for a home sits atop a realtor’s sign in Jackson, Mississippi, Wednesday, Sept. 25, 2019. (AP Photo/Rogelio V. Solis)

Higher mortgage costs combine with large and ongoing rent increases for apartments and rental homes, impacting many US households.

Land sales — especially in growth markets — are slowing, with builders and developers holding back purchases. Banks, securities firms, builders and real estate developers are also starting to lay off workers as the housing market slows.

The California Association of Realtors reported on June 16 that home sales in May were down 9.8% from April and 15.2% from a year ago. The property group said home sales volumes were at their lowest since June 2020.

The slowdown in sales is also reflected in more homes staying on the market longer. The Florida Realtors group reports a 31.5% increase in inventories of homes for sale compared to last May.

“We actually started to see a change towards the end of the first week of May,” said Jennifer Calenda, broker-owner of Calenda Real Estate Group in Punta Gorda. “We’ve gone from a frenzy to a bit more normal pace here.”

Sharon Neuhofer, president of the Punta Gorda-Port Charlotte-North Port-DeSoto Realtors, said prices have “definitely stabilized, but it’s still a seller’s market.”

She attributed the slowdown in prices to higher interest rates.

“But if a house is priced right, it will sell,” Neuhofer said, adding that if the market isn’t “boiling, it’s simmering.”

High end sales down

Sales of luxury homes are also slowing with higher interest rates and falling US stock markets weighing on wealthy buyers.

Real estate company Redfin reports that sales of luxury homes fell 17.8% between February and April 2022 compared to a year ago. These are the 5% most expensive homes in a given real estate market.

This includes a 27% drop in luxury home sales in Phoenix, a 33% drop in Austin, a 24% sales slowdown in Portland. New York City was the only major U.S. real estate market to see luxury sales growth (30%), according to Seattle-based Redfin.

“The pool of qualified people to buy luxury properties is shrinking because the stock market is down and mortgage rates are rising,” said Elena Fleck, Redfin real estate agent in West Palm Beach, Florida. “The good news for buyers is that the market is leveling out and the competition is easing. Of course, this does not help the dozens of Americans whose price has been completely exceeded.

The median price of a luxury home is $1.15 million nationwide, according to Redfin. These median prices include $5.5 million in San Francisco and $4 million in New York, $2.6 million in Miami, $1 million in Baltimore, and $656,000 in Cleveland.

Recession in sight?

While Powell and US Treasury Secretary Janet Yellen hope for a soft landing in the economy, the current situation and monetary trajectory could mean that consumers are potentially facing high interest rates affecting housing, auto loans and other financing, combined with continued high inflation (including record high gas prices and high grocery prices).

The combination could lead to a slowing economy but persistently high prices – the opposite of a soft landing.

A survey by California-based Freedom Financial Network found that 50% of US consumers would have to use credit cards or borrow money from family and friends if they faced an unexpected expense. $1,000 or more.

A central bank policy aimed at stunting wage growth won’t help consumers worried about gasoline prices of $5 a gallon or more and double-digit increases in the prices of groceries and other goods basic.

It also includes double-digit increases in apartment rents and a dearth of affordable housing options in expensive coastal cities, rural areas and growing markets. The largest rent increases are in Florida markets, according to CoStar Group and its subsidiary

“More people are living paycheck to paycheck now,” Calenda said.

Federal Reserve Powell

Sen. John Kennedy, R-La., questions Federal Reserve Chairman Jerome Powell during the Senate Banking, Housing, and Urban Affairs Committee hearing as he presents the monetary policy report to the committee on Capitol Hill on Wednesday, June 22, 2022, in Washington. (AP Photo/Manuel Balce Ceneta)

An analysis by TransUnion found that apartment rents increased by 14% between 2020 and 2021, but median renter incomes increased by 6%. The median income for an apartment renter is $37,232, according to the credit reporting agency. These income brackets feel the brunt of inflation the most and could also be the hardest hit by higher interest rates.

The median income for apartment renters in 2020 before the COVID pandemic was $35,000, according to TransUnion.

U.S. Senator Elizabeth Warren, D-Massachusetts, worries these households will bear the brunt of interest rate hikes, while other drivers of inflation such as industry consolidations and the impact of the Russia’s war in Ukraine and US sanctions will persist.

“The reason I raise this and the reason I’m so concerned about this is that rate increases make it more likely that companies will lay people off and cut hours to reduce labor costs. Rate increases are also making it more expensive for families to do things like borrow money for a home – and so far this year the cost of a mortgage has already doubled,” Warren told Powell. at the June 22 hearing.

Warren worries that the Fed is “tipping this economy into a recession.”