Fed Holds Rates Steady; Promises More Patient Approach to Future Rate Hikes

John Jordan | January 2019

NAR Chief Economist Lawrence Yun

WASHINGTON—In what can only be viewed as great news for Realtors and the residential real estate market, the Federal Reserve on Wednesday decided to hold rates steady and even signaled an end to what had been seen by some as an aggressive policy of raising rates.

The Federal Reserve decided to maintain the federal funds rate at 2.25% to 2.50% and has opted for a more “patient” strategy going forward.

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the Federal Reserve said in a prepared statement.

The Federal Reserve also noted, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

“The case for raising rates has weakened somewhat,” Fed Chairman Jerome Powell said at a news conference, according to a report in USA Today. “The U.S. economy is in a good place.” However, he cautioned that there is growing evidence of “crosscurrents,” including slower growth in China.

The new strategy by the Federal Reserve is in dark contrast to its policy statement a month ago that said the central bank’s Federal Open Market Committee “judges that some further gradual increases” in the federal funds rate would be forthcoming.

The new monetary policy comes as the National Association of Realtors reports continued declines in pending home sales, due at least in part to higher mortgage interest rates.

Pending home sales declined as a whole in December, but for the second straight month the Western region experienced a slight increase, according to statistics released by the National Association of Realtors on Jan. 30.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, decreased 2.2% to 99.0 in December, down from 101.2 in November. Additionally, year-over-year contract signings fell 9.8%, making it the 12th straight month of annual decreases.

Lawrence Yun, NAR chief economist, cited several reasons for the decline in pending sales. “The stock market correction hurt consumer confidence, record high home prices cut into affordability and mortgage rates were higher in October and November for consumers signing contracts in December,” he said.

All four major regions experienced a decline compared to one year ago, with the South sustaining the largest decrease.

Yun says so far, the partial government shutdown has not caused any obvious damage to home sales. “Seventy-five percent of Realtors reported that they haven’t yet felt the impact of the government closure. However, if another government shutdown takes place, it will lead to fewer homes sold,” he said.

According to Yun, as the government reopens, more mortgage options will come available for consumers. “Some home transactions were delayed, but we now expect those sales to go forward,” he said.

Still, there is growth in certain pockets. Yun cited year-over-year increases in active listings from data at realtor.com to illustrate a potential rise in inventory. Denver-Aurora-Lakewood, CO., Seattle-Tacoma-Bellevue, WA, San Francisco-Oakland-Hayward, CA, San Diego-Carlsbad, CA and Portland-Vancouver-Hillsboro, OR-WA. saw the largest increase in active listings in December compared to a year ago.

Yun says despite the low home sales in December, he is confident that the housing market will see improvement in 2019. “The longer-term growth potential is high. The Federal Reserve announced a change in its stance on monetary policy. Rather than four rate hikes, there will likely be only one increase or even no increase at all,” Yun said. “This has already spurred a noticeable fall in the 30-year, fixed-rate for mortgages. As a result, the forecast for home transactions has greatly improved.”

December Pending Home Sales Regional Breakdown

The PHSI in the Northeast rose 2.0% to 93.2 in December, and was 2.5% below a year ago. In the Midwest, the index fell 0.6% to 97.5 in December, 7.2% lower than December 2017.

Pending home sales in the South fell 5% to an index of 109.7 in December, which was 13.5% lower than a year ago. The index in the West increased 1.7% in December to 88.4 and fell 10.8% below a year ago.

John Jordan
Editor, Real Estate In-Depth