Rate Hikes Expected To Be Drag on Housing

(KNSI) – The American economy shrunk in the first quarter, but Saint Cloud State University economist King Banaian says that won’t be enough to alter the course of the Federal Reserve Bank. The weak components of the report included exports and inventories, not personal consumption or business investment.

Banaian says that when you look at the two directives of the Fed’s dual mandate, both metrics suggest it is time for monetary tightening. He says, “The unemployment rate has been very strong, has been dropping, so they don’t need to really act on that. But they do need to act on the higher inflation rate.”

In the State of Minnesota, the unemployment rate sits at 2.5%, tied for a record low. Inflation across the country soared to 8.5% in March, a 41-year high.

Banaian says the housing industry will suffer when the Fed follows through on its promises of multiple rate hikes of at least a half percent. He notes the debt market is already pricing it in. “Mortgage rates have gone from 3% to 5%, and so I think residential investment might end up being a drag in the latter part of the year.”

The mortgage industry is bracing for a slowdown. Wells Fargo laid off lenders in the sector at multiple locations last week. Rocket Mortgage is offering buyouts to try and trim 8% of its workforce, including title specialists.

The Mortgage Bankers Association’s weekly applications index has been trending down steeply. For the week ending April 22nd, refinancing applications fell by 71% compared to the same time last year. Purchase apps were off by 17%. Both the Easter and Passover holidays most likely played some role in the figures.

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