The Federal Reserve’s policy tightening has nudged the US housing market into a slump — and policymakers have yet to fully acknowledge the extent of the trouble, according to a prominent economist.

Ian Shepherdson, a chief economist at Pantheon Macroeconomics, provided a bearish outlook for homeowners after federal data showed sales of new single-family homes hit their lowest level in nearly seven years in July.

Sales fell 12.6% to a seasonally adjusted annual rate of 511,000, well below consensus expectations.

“The housing market is in much worse shape than the Fed has been willing to admit,” Shepherdson said in a note to clients. “But policymakers have made it clear that inflation is their primary objective, and housing is collateral damage.”

After booming during the COVID-19 pandemic, the housing market has cooled in recent months as the Fed hikes interest rates in a bid to tame inflation. The Fed’s effort to cool spending and slow demand within the economy has caused a noticeable slowdown in home sales and a downtick in prices.

Mortgage rates have nearly doubled since January, rising to 5.13% for a 30-year loan as of last week, according to Freddie Mac. But rates have actually fallen slightly since surging above 5.8% in June as fears mount that the Fed’s actions will trigger a recession.  

While new home sales have plunged below pre-pandemic levels, the slowdown in home prices and recent decline in mortgage rates suggest “the steepest declines in sales are behind us,” according to Shepherdson.

Fed Chair Jerome Powell
Fed Chair Jerome Powell recently acknowledged the housing market needed a “reset.”
Xinhua News Agency via Getty Ima
Economist Ian Shepherdson said the housing market is "collateral damage" as the Fed hikes rates.
Economist Ian Shepherdson said the housing market is “collateral damage” as the Fed hikes rates.

At the same time, he warned that the “worst is yet to come” for home prices. Housing inventory has hit its highest level since April 2009 even as demand plummets due to affordability challenges, according to Shepherdson.

“We expect sharp month-to-month declines in new home prices for the foreseeable future,” he said.

Fed Chair Jerome Powell acknowledged rapidly changing conditions in the housing market following the bank’s meeting in July. At the time, he suggested a cooldown would eventually be helpful to prospective homebuyers who struggled to find a house during the pandemic-era boom.

“I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset,” Powell said. “We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”

Fed Chair Jerome Powell
The Fed’s policy tightening has weighed on the housing market.
Bloomberg via Getty Images

Minutes from the Federal Open Market Committee’s meeting last month also touched on the issue and pointed to an awareness among policymakers that housing conditions have softened.

Officials said “housing activity had weakened notably” and predicted the “slowdown in housing activity would continue.”

As The Post reported, Zillow analysis this week showed US home values sank for the first time in a decade in July, declining 0.1% compared to the previous month.

Shepherdson has repeatedly expressed bearish views about the state of the housing market in recent months. In July, he warned that he expected home prices to plunge “substantially” on “cratering” demand.

At the time, he projected that home prices were “about 15% to 20% overvalued” relative to incomes.


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