"US Housing Market Slump Expected to Aid Fed's Inflation Fight"

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), may find recent housing market downturn helpful in its ongoing battle against inflation, the Wall Street Journal (WSJ) analyzed on the 25th (local time).

[Image source=Reuters Yonhap News]

According to the report, due to the Fed's aggressive interest rate hikes since the beginning of this year, some recent indicators confirm that the U.S. housing market is experiencing a downturn comparable to the 2007?2009 financial crisis. This has increased the likelihood of inflation easing while also making economic contraction more realistic.

WSJ evaluated that the COVID-19 pandemic, which struck the U.S. in March 2020, combined with the spread of remote work, Americans' desire for larger living spaces, and zero interest rates, triggered an unexpected housing market boom. However, this overheating has cooled down following the Fed's seven rate hikes this year.

As the Fed raised the benchmark interest rate to the 4.25?4.5% range, the average 30-year fixed mortgage rate surged from the 4% range in March to the 7% range last fall. Although it recently eased somewhat to 6.3%, it remains at a high level. The Mortgage Bankers Association reported that as of November, the monthly mortgage payments Americans must make have jumped 43% compared to the beginning of the year.

WSJ stated, "High interest rates suppress spending, employment, and investment, thereby curbing inflation. The housing market, sensitive to interest rates, usually feels this first," but added, "The speed and intensity this year have surprised the market." Lou Vance, a mortgage banker in Boulder, Colorado, described it as "the worst interest rate shock seen so far."

Existing home sales in November declined for the tenth consecutive month. Economists from Goldman Sachs and others forecast that in 2023, sales will fall to levels lower than those during the 2006?2011 housing market downturn. The rate of increase in housing rents has also recently slowed. Rick Campo, CEO of Camden Property Trust headquartered in Houston, conveyed the mood, saying, "Everyone involved in housing development projects is currently at a standstill."

Moreover, the housing market downturn is expected to reduce demand in related industries such as home appliances, remodeling, and moving. WSJ reported, "All of these will have a strong impact on inflation." The housing market accounts for one-third of the U.S. Consumer Price Index (CPI) and one-sixth of the U.S. Personal Consumption Expenditures (PCE) price index. Given the time lag before these effects are reflected in actual price indicators, WSJ diagnoses that inflation could sharply decline next year. The outlet added that one reason the Fed projects the PCE price index, currently around 6%, to slow to 3.1% by the end of next year is this trend.

However, it remains uncertain whether the 2% inflation target can be achieved. Recent high wage growth is considered a key factor. Wage increases can support consumer spending and back companies' price hike scenarios. CEO Campo mentioned, "Wage pressure continues."

This content was produced with the assistance of AI translation services.