[New York Diary] "Wait" Powell Discourages Home Purchases... U.S. High-End Home Transactions Plummet

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joeslgina] "If you are planning to buy a house, a bit of a reset may be necessary."

This was stated by Jerome Powell, chairman of the U.S. Federal Reserve (Fed), the central bank of the United States, right after the Fed raised interest rates by 0.75 percentage points in a giant step this week. It is considered quite unusual for the central bank chairman to directly mention the real estate market at a press conference and discourage home purchases.

This warning is closely related to the recent surge in U.S. mortgage rates to the highest level in 13 years and the freezing of the housing market. Following the stock market being hit hard by rapid tightening and fears of a recession, there is speculation that the next target could be the real estate market.

According to mortgage lender Freddie Mac, the average 30-year fixed mortgage rate in the U.S. was 5.78% for the week of the 10th to the 16th (local time). This is the highest level since November 2008. Compared to last week's average mortgage rate (5.23%), it jumped 0.55 percentage points in just one week. The WSJ reported that this weekly increase is the largest since 1987. The 30-year fixed mortgage rate was in the mid-2% range in January 2021.

As the Fed's tightening cycle intensifies and mortgage rates soar, housing demand in the U.S. appears to be sharply declining. Sam Khater, chief economist at Freddie Mac, said, "The Fed's rate hikes have caused loan rates to rise sharply," and predicted, "The rise in loan rates will cool the heated housing market that surged during the pandemic."

In May of this year, Americans who purchased median-priced homes had to pay $740 (about 960,000 KRW) more per month in mortgage costs compared to May last year when the average mortgage rate was around 3%. This has created an atmosphere where Americans are stepping back from buying homes.

The chill in the housing market is also evident in new housing starts. In May, new housing starts were 1.55 million units (annualized), down 14.4% from the previous month. This fell short of expert forecasts (1.69 million units) and marked the largest decline since April 2020, early in the COVID-19 pandemic. New housing permits, an indicator of future housing market trends, also decreased by 7% from the previous month in May. The National Association of Home Builders' housing market index for June, released on the 15th, was 67, the lowest since June 2020.

Daryl Fairweather, chief economist at Redfin, said in a recent report, "The picture of the U.S. housing market deteriorating is becoming increasingly clear."

Transaction volumes are also clearly declining in the high-end housing market. Earlier, the Wall Street Journal (WSJ) reported, citing real estate brokerage Redfin, that high-end home sales in the top 5% of market prices from February to April decreased by 18% compared to the same period last year. Regionally, the declines were particularly notable in Nassau County, New York (-43.5%), Oakland, California (-35.1%), Dallas, Texas (-33.9%), Austin, Texas (-33%), and West Palm Beach, Florida (-32.8%).

A broker specializing in high-end home sales in Manhattan, New York, also told the WSJ that high-end home sales volume was the largest since 2006 at the end of last year but began to plummet starting in May this year. As high-intensity tightening has weighed on global stock markets and recession fears have increased this year, buyers worried about being trapped at peak prices are reluctant to purchase homes, fearing the impact on the real estate market. Another housing broker mentioned that while high-end home buyers are less sensitive to interest rates, adjustments in the financial market will eventually negatively affect the real estate market.

Economists are paying close attention to the fact that most recessions have occurred after housing market indicators have deteriorated. Powell's statement that he is willing to endure some pain to curb inflation also signals a forecast of a sharp drop in some bubble-inflated real estate asset prices.