The housing market could plunge into recession if the Federal Reserve offsets the benefits of tax cuts by raising interest rates above 6% by the end of 2019, according to the National Association of Homebuilders.
“If we get interest rates north of 6% sometime between now and at the end of next year and we don’t see some correction in the labor markets, in the regulatory burden, then I think you could see the potential for a housing recession, but it would be caused by a lack of supply,” Jerry Howard, the group’s CEO, told FOX Business’ Neil Cavuto on “Cavuto: Coast to Coast.”
After Trump signed the tax overhaul in December, stocks skyrocketed to record levels, encouraging some companies to award bonuses and raise wages. Earlier this month, equity indexes dropped 10% from recent highs, which many investors refer to as a correction, before largely rebounding.
The recent market volatility has left investors concerned over whether the Fed will raise the benchmark federal funds rate more than expected, which could lead to another major sell-off.
Howard cited three factors that are affecting the markets and what would sway the Fed to increase rates: a labor shortage, the cost of building materials and construction regulations imposed over the past eight years. “Those three factors are really impacting markets more than anything else right now,” he said. The economy is growing, and I think that’s what’s forcing interest rates up.”
In 2017, the Fed raised interest rates by 0.75 percentage point, and the target range for the federal funds rate is now 1.25% and 1.50%. Under the new Fed chair, Jerome Powell, the market projects that the central bank is expected to raise rates three or four times this year.
“We expect there will be another maybe five fed rate hikes over the course of this year and next year,” Howard said. “We expect that it will end up still south of 6%, maybe about 5 1/2%, and we think that the market can take that.”