Growth has to move down, that’s what has to happen for inflation to come down. We have to slow growth. We don’t have precision tools, we can’t say let’s dial it in to this exact level, we raise interest rates, that affects financial conditions, and financial conditions affect the economy. So there are a couple of steps there, it is not in any way a surgical precision set of tools. So there could be some pain involved to restoring price stability, but we think we can maintain a strong labor market, defined as one where unemployment remains low and wages are moving up.
– Fed Chairman Pro Tempore Powell
With mortgage rates at their highest level since 2009, house prices up 20%, real income growth negative, and financial markets extremely volatile, there is naturally a lot of concern around the state of the U.S. economy. And an important factor within that is the housing market, given its interest rate sensitive nature and high multiplier impact across the rest of the economy. It is also one that should be starting to feel the impact of Powell’s blunt tools. Hence, with mortgage rates having already increased and home builder sentiment falling, fears are growing that we may be on the brink of another major real estate collapse in a manner similar to the last financial crisis.
In this Economics Weekly, we take a snapshot of the housing market with the view that activity will continue to moderate, though a major collapse seems unlikely.
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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.