The Federal Reserve Bank of New York recently issued a warning that Americans may be undergoing a credit crunch. Ten days later, on July 26, the national Federal Reserve Board voted to hike interest rates again by a quarter of a percentage point.
Financial analysts noted that was the 11th such hike in the last 12 Fed meetings. Further, Fed Chairman Jerome Powell did not rule out another rate hike when the board reconvenes in September.
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Why would the Fed vote to hike interest rates when its own data indicate that there could be a problem, rather than leaving the rate unchanged or even lowering it? One industry expert suggested to the Washington Examiner that board members might be looking to the housing market with trepidation.
The SCE Credit Access Survey by the New York Fed’s Center for Microeconomic Data, released in July, flagged some troubling numbers.
“The average reported probability that a loan application will be rejected increased sharply for all loan types,” the New York Fed reported of the June numbers. “It rose to 30.7 percent for auto loans, 32.8 percent for credit cards, 42.4 percent for credit limit increase requests, 46.1 percent for mortgages, and 29.6 percent for mortgage refinance applications. The readings for auto loans, mortgages, and credit card limit increase requests are all new series highs.”
Overall loan application rates were down slightly as well.
“The application rate for any kind of credit over the past twelve months declined to 40.3 percent from 40.9 percent in February, its lowest reading since October 2020,” the report summary said. “Application rates declined to 11.9 percent for auto loans and 12.5 percent for credit card limit requests, but increased to 24.8 percent for credit cards, 6.5 percent for mortgages, and 5.3 percent for mortgage refinances.”
Those last two indicators may hold some clue to the Fed’s rate hike, Fannie Mae’s former chief credit officer Edward Pinto hinted. Pinto is currently director of the American Enterprise Institute’s Housing Center, which the website says aims to provide “transparent and objective mortgage and housing market trends at unprecedented levels of detail.”
Contra reports of a credit crunch, “from our perspective, credit is becoming slightly more available,” Pinto told the Washington Examiner after the Fed cast its vote to hike rates.
“That is largely due to an increase in FHA share,” he said.
The Federal Housing Administration is an agency within the Department of Housing and Urban Development that insures loans from lenders to select home buyers, typically to first-time buyers.
FHA credit is the “easiest credit” for many Americans to get their hands on, Pinto said, because of government guarantees, and it is growing.
“In April 2022, the FHA share [of the overall American home loan market] was 18%; now it’s 24%,” he said.
Fed board members have hiked interest rates 11 times recently in an effort to break the back of inflation and looked to housing as a significant indicator. But Pinto suggested that some factors in the housing market are currently beyond their command.
Nationally, the hiking of housing prices “slowed down tremendously from the pace they were at, but they did not get below zero,” he said. The housing market now looks likely to be heading well above the Fed’s overall target of 2% inflation annually.
“The Fed wasn’t expecting that,” Pinto said.
Pinto gave several reasons for a robust housing market that continues to climb higher even at interest rates for borrowers above 7%.
“We have a huge supply problem,” he said, which has multiple causes. The biggest and most obvious supply problem is that building in most areas has not kept up with the demand for housing.
“The interest rate isn’t having the effect they expected,” precisely because the supply of housing is so low, he said.
Another supply problem is that many people aren’t willing to sell because they bought or refinanced during the pandemic at very low rates, often 2%-3%.
“If you don’t have to move, you won’t,” he said. “You’ll just sit tight with the house you have.”
Barring a recession, Pinto reckoned it will take a decade to work out the “lock-in effect” of those low rates, which were made possible by massive stimulus, care of the Fed.
Pinto said that from a policy perspective there really isn’t one national housing market, but rather two “punch bowls,” after former Chairman William McChesney Martin’s quip that the Fed “is in the position of the chaperone who ordered the punch bowl removed just when the party was really warming up.”
The two “punch bowls” are the low and high ends of the housing market. The low end is for first-time buyers who historically have gotten the juice, care of FHA-backed loans.
The high-end punch bowl is usually left largely alone by the Fed, though its response to the pandemic changed that. It “soared” for a while, Pinto said. Though, high-end housing prices in most markets have drifted down some after the Fed eased back on that.
One realtor who has some experience with the high end of the market agrees. He told the Washington Examiner that in large dollar houses currently, cash is king.
“It’s interesting and quite sensible actually — this real estate climate for buyers,” said Ryan Kent Smith, managing broker and lead of John L. Scott Real Estate in Washington state.
Smith added, “Where we previously might have seen multiple offers, virtually as a rule, our market currently sees strong cash buyers exerting the sheer simplicity of their cash, chasing competing offers away with the power of a streamlined, clean offer. No appraisals; an assurance of uncomplicated beauty. Simplicity typically wins.”
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While higher-dollar houses are more of a buyer’s market currently, that isn’t necessarily the case for lower-priced domiciles. Part of this is due to a recent lowering of FHA premiums, Pinto said. This made those loans slightly cheaper at the same time the Fed was working to bid them up.
Another part of the still-rising sale prices of this type of housing is that there are more people who want to own homes than there are homes available. That’s not a problem the Fed is prepared to do much about.
