The Tell: High rents and Fed’s inflation fight to push key mortgage rate above 7%: BofA Global

by | Sep 27, 2022 | Stock Market

America’s housing shortage and the Federal Reserve’s inflation battle look poised to push the benchmark 30-year mortgage rate above 7%, according to strategists at BofA Global. More than a decade of underbuilding in the U.S. housing sector has been squeezing renters and potential home buyers. Now, analysts at one of Wall Street’s biggest banks see the imbalance as complicating the Fed’s efforts to bring inflation down from a nearly 40-year high.

While the Fed’s course of aggressively higher interest rates in 2022 already has dramatically cooled off U.S. stocks, bonds and sent the American housing market into a recession, borrowing costs for households and businesses are still climbing. With shelter representing more than 30% of the consumer price index, the “Fed’s inflation-fighting problem is arguably getting worse,” Chris Flanagan’s securitized products strategy team at BofA Global wrote, in a weekly client note. Even though the Fed didn’t create the housing shortage, its rush to increase rates has shocked bond yields and mortgage rates higher. That’s been feeding an acceleration of inflation in “owners’ equivalent rent” (OER) as home-buyer affordability has collapsed, causing more competition for renters, the team said. The OER rate hit 8.9% in August (see chart), and looks likely to remain a challenge for the Fed going forward, particularly with the rental vacancy rate at 5.6%, the lowest since 1984, according to the BofA team.

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