Trade groups have warned that the housing market will drag the economy into a sharp decline unless the Fed takes these “simple steps.”

• Housing trade groups urged the Fed to stop raising interest rates immediately.

• The NAHB, MBA, and NAR warned that a sharp decline is likely, unless the Fed takes “two simple steps.”

• Further rate hikes would pose broader risks to growth, which would “increase the likelihood and magnitude of a recession.”

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The Federal Reserve needs to take “two simple steps” to ensure a soft landing in the economy, according to three housing industry trade groups.

The National Association of Home Builders, the Mortgage Bankers Association and the National Association of Realtors warned Federal Reserve Chairman Jerome Powell in a letter Monday that further rate hikes would virtually guarantee a hard landing in the form of a recession.

Trade groups highlighted that the spread between 30-year mortgage rates and the 10-year Treasury yield has reached historic levels, “suggesting deep uncertainty about the direction the Fed is headed.”

“Further and more widespread interest rate increases pose broader risks to economic growth, increasing the likelihood and magnitude of a recession,” the letter warned.

Trade groups noted that housing activity represents an estimated 16% of gross domestic product in the United States. The sudden slowdown in new and existing home sales is likely to have ripple effects throughout the broader economy if sales do not rebound soon.

To correct the current situation, trade groups urged the Fed to make two statements:

1. “The Fed is not considering further rate hikes.”

2. “The Fed will not sell any of its holdings of mortgage-backed securities until the housing finance market stabilizes and mortgage-to-Treasury spreads return to normal.”

The Fed has been thinning its balance sheet by reducing and reinvesting up to $60 billion in Treasuries and up to $35 billion in mortgage-backed securities each month.

Although the central bank did not sell assets directly, the so-called quantitative tightening process shrank its balance sheet by about $1 trillion from its March 2022 peak of $9 trillion.

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“These steps will provide the market with greater certainty about the Fed’s interest rate path and its plans for the mortgage-backed securities portfolio and reduce volatility for traders and investors,” the letter said.

Both of these steps are also likely to help improve homebuilder sentiment, which would go a long way to helping bring a new supply of homes to the market.

Increased housing supply would help reduce the inflationary shelter costs that have pushed inflation higher over the past year.

“We urge the Fed to take these simple steps to ensure this sector does not precipitate the hard decline the Fed has tried so hard to avoid,” the letter concluded.

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