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Real estate groups implore the Fed to stop rate hikes as housing activity deteriorates

The biggest real estate trade groups are calling on the Federal Reserve to rein in its interest rate efforts to prevent more volatility in the housing market.

In a letter to Fed Chair Jerome Powell this week, the Mortgage Bankers Association (MBA), the National Association of Realtors (NAR), and the National Association of Home Builders (NAHB) urged the Fed to state that it’s not considering further rate hikes and that it will hold off on selling any more mortgage-backed securities until the housing finance market stabilizes.

The move is the first time the groups have addressed the central bank directly since its rate-hiking campaign began in March 2022 and provides the latest sign of how "ongoing market uncertainty" around the Fed’s rate course is pummeling the housing market, which — the groups say — could spill over to the broader economy.

"This has exacerbated housing affordability and created additional disruptions for a real estate market that is already straining to adjust to a dramatic pullback in both mortgage origination and home sale volume. These market challenges occur amidst a historic shortage of attainable housing," the groups wrote.

"Further rate increases…pose broader risks to economic growth, heightening the likelihood and magnitude of a recession."

A Fed spokesperson had no comment on the letter.

Federal Reserve Chair Jerome Powell holds a press conference in Washington, D.C., the United States, Sep. 20, 2023. (Photo by Aaron Schwartz/Xinhua via Getty Images)
Federal Reserve Chair Jerome Powell holds a press conference in Washington, D.C., on Sept. 20. (Photo by Aaron Schwartz/Xinhua via Getty Images) (Xinhua News Agency via Getty Images)

The housing landscape has significantly changed after the Fed started hiking its short-term benchmark rate from near 0% in March 2022 to 5.25% now to dampen inflation.

The Fed’s policy moves indirectly pushed mortgage rates higher with the average rate on the 30-year fixed mortgage following the increasing yield on the 10-year Treasury. The rate has topped 7% and remains at a 23-year high with the chances of reaching 8% growing likelier.

As a result, not only have many buyers fled the market amid costlier borrowing costs, but also many homeowners aren’t selling their properties because they don’t want to lose their current low mortgage rate. That has led to fewer transactions, a major blow to the real estate agents and brokers represented by the NAR.

Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?

Sales of previously owned homes slid again in August from the previous month, with the pace off 15.3% from a year ago, according to the latest data from NAR. Separately, pending home sales — a leading indicator of future activity — plunged 7.1% in August from the month prior.

The pullback in activity has also walloped the mortgage market.

Application activity fell to the lowest point since 1996 for the week ending Sept. 29, according to the MBA, which represents the financing industry for both single- and multi-family loans. As a result, layoffs have been rampant in the industry.

For example, US Bank, the fourth largest mortgage lender, laid off staff members in its mortgage division this summer, while Wells Fargo earlier this year cut more than 500 mortgage bankers.

Even homebuilders, which enjoyed a better-than-expected spring selling season, are losing their enthusiasm.

More homebuilders think housing conditions are poor, with confidence retreating for the second straight month in September, according to the NAHB, the third lobbying group on the letter and an association representing more than 140,000 members in homebuilding, remodeling, and multi-family construction.

"The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power," NAHB Chairman Alicia Huey, a custom homebuilder and developer from Birmingham, Ala., said in a statement when the confidence numbers were released.

Despite the real estate industry's concerns over the housing downturn, the Fed has made it clear that it plans to keep interest rates higher for longer, with investors debating what "longer" exactly entails.

This week, Dallas Fed President Lorie Logan warned that if the economy remains strong, then investors could expect "continued restrictive financial conditions" until the central bank hits its 2% inflation target.

But with housing activity accounting for nearly 16% of gross domestic product, any further hikes could be a danger to the economy, the real estate groups wrote.

Instead, their prescribed "steps will provide the market greater certainty about the Fed's rate path and its plans for the MBS portfolio and reduce volatility for traders and investors," they wrote.

"We urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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