Further Downshift for the Fed

Further downshifting its pace of tightening of monetary policy, the Federal Reserve’s monetary policy committee raised the federal funds target rate by 25 basis points, increasing that target to an upper bound of 4.75%. This marked a smaller increase after four previous 75 basis point hikes and a decelerated 50 basis point increase last December. While not the end of tight monetary policy, the end of tightening is in sight, with a final 25 basis point increase expected in March.

However, the Fed has clearly communicated it will hold at these elevated rates through much if not all of 2023 as progress on inflation is realized. We do not expect an easing of the federal funds rate until 2024.

What does this mean for housing? While the economy is expected to fall into a mild, official recession during the first half of 2023, the period of peak mortgage rates may now be behind us. Thus, recent soft optimism for a rebound of the housing market is gaining traction (such as the January uptick for the NAHB/Wells Fargo HMI). Starts will decline in the near-term and existing home prices will continue to decline during the year, but a turning point for single-family construction is now in view.

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