The Fed’s continued refusal to cut interest rates will exacerbate the housing market’s issues this spring. iStock illustration

When it comes to describing what’s happening right now in the real estate market, you can take your pick, but downturn, recession or even depression all seem like good fits right now.

You just wouldn’t know it from reading the business press.

We are bombarded daily with stories about how absolutely wonderful the economy is right now, coupled with puzzlement in the media why so many Americans nevertheless feel so glum. But amazingly, few – if any – of these stories look at the major and very troubling exception to the trend of decent economic news, from falling inflation to a low jobless rate.

And that would be the deep ditch the real estate market has tumbled into, from anemic home sales to the collapse of promising new development projects.

Real estate is just one part of a huge and complex U.S. economy, but when you add it all up – from the development of new lab projects and apartment buildings to new subdivisions and single-family home sales – you end up with roughly 20 percent of the U.S. economy.

Whether a fifth of all commercial activity in the country can slide into a deep slump without eventually dragging down the rest of the economy with it is a question for another day. Suffice it to say, real estate downturns have been the catalyst for some of our toughest recessions – think the housing bust of the late 1980s and the bursting of the home price bubble back in the mid-2000s.

That said, whether the real estate market starts to come out of the fetal position anytime soon depends to a significant degree on what the Fed does with interest rates.

Inventory Issues

And here again, most of the media – not just the mainstream media, but the business press as well  – has done a poor job detailing what is at stake when it comes to what the Fed’s next moves may be over the coming months and over the course of the next year.

There have been reams of stories written on the progress of the Fed’s campaign to bring down inflation by hiking interest rates. And the story is too often framed as a battle to bring down prices for consumers, and the success or failure of the Fed’s crusade against inflation based on measures of consumer sentiment and even voter attitudes as we move closer to the 2024 presidential election.

But few, if any, attempts are made in the financial press to tie in the disparate impacts the Fed’s rate hikes have had on different sections of the real estate market, let alone the entire economy.

Stories are typically siloed, focusing on homebuyers and sellers or more broadly, consumers, as if they are unrelated beings inhabiting unrelated spheres of reality. A larger, more global view is needed to make sense of the tradeoffs the Fed is making as it digs in its in heels and pushes back against pressure to start immediately cutting rates after its prolonged and sustained campaign of rate hikes.

A hotter than expected reading of the consumer price index last week put the nail in the coffin for any hopes that the Fed might start cutting rates in March, which was already unlikely. And it also raises questions about whether the Fed will be ready to pull the trigger at its May meeting.

That could put a big damper on the spring home sales market, both in the Boston area and across the country, with the combination of high interest rates and record high prices having already pushed large numbers of buyers out of the market. It’s also bad news for potential sellers in our inventory-starved market, many of whom are sitting on low-rate mortgages and are loath to make the jump to a better or larger home if that means a big increase in monthly payments.

An Endless Inflation Loop

But it’s not just homebuyers and sellers who will bear the brunt of the Fed’s ongoing drive for complete victory over inflation. Developers looking to build new homes and apartments, so desperately needed to bring down prices and rents, will also pay the price.

Higher rates will continue to make it harder for developers to cobble together the financing needed to push ahead with new projects, especially in super high cost metro markets like Boston, New York and Los Angeles, where the need for new apartments and housing is arguably the strongest.

In fact, by keeping rates higher longer, the Fed could be shooting itself in the foot when it comes to inflation.

Why? Well, rents are a key metric that goes into the government’s inflation calculations. And with fewer new apartment buildings in the pipeline, the pressure on rents – and inflation – will only grow, further staying the Fed’s hand when it comes to rate reductions.

It’s an obvious connection to anyone with any understanding of the dynamics of development and the interplay of supply and demand in the housing market.

But it is clearly not obvious to what passes for the financial media these days, which, from the looks of it, doesn’t have a clue.

Scott Van Voorhis is Banker & Tradesman’s columnist and publisher of the Contrarian Boston newsletter; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.