A brief excerpt:
Goldman Sachs economist Ronnie Walker put out a research note this morning titled: “Will Higher Rates Put Out the Housing Fire?”
Walker discusses the recent sharp increase in mortgage rates and writes:
“Standard economic models suggest that an increase of that magnitude should weigh substantially on housing, the most interest rate-sensitive segment of the economy and the textbook channel of monetary policy transmission.”
Last month, in Housing, the Fed, Interest Rates and Inflation, I noted that housing is a key transmission mechanism for Fed policy. However, Walker argues that
“the extreme supply-demand imbalance in today’s housing market will likely dampen the hit to activity from higher rates”.
This is critical, and if correct, may suggest the Fed will have to hike rates more than expected.
Along these lines, over the weekend, Nick Timiraos at the WSJ tweeted:
High levels of all-cash sales and investor purchases may make housing markets more resilient to a big run-up in mortgage rates that is depriving shocked buyers of purchasing power
And I responded:
The new conundrum: The Fed’s primary channel of policy transmission is housing. The more resilient housing is to rates, the more the Fed will have to hike to cool embedded inflation.
Interesting times!
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