Federal Reserve Pulls Back on Stimulus in Response to Weakened Housing Affordability

Despite positive economic growth posting the best year since 1984, according to NAHB Now, rising home prices, construction costs, and mortgage rates will push more buyers out of the market as affordability wanes in the coming months.

Exacerbated housing conditions are a result of major supply-chain disruptions and a nationwide labor shortage expected to persist into 2022. Weak growth within the building industry is highlighted by the third quarter GDP data, which revealed that real GDP expanded by just 2%, far less than experts originally expected.

With clear signs of rising material prices and expected wage gains from a hot labor market, the Federal Reserve is reducing its accommodative monetary policy stance. While the federal funds rate is being held near 0%, the Fed has announced the beginning of tapering, or reducing, its purchases of mortgage-backed securities and Treasuries. This process is expected to end by mid-2022, during which time interest rates should gradually increase.

Inflation data show why the Fed is pulling back on stimulus: Year-over-year consumer inflation in October was up 6.2% — the strongest reading in 30 years. Moreover, the October Producer Price Index recorded its fastest pace in 11 years with an 8.6% year-over-year gain for wholesale prices.

Read More