The U.S. housing shortage and the Federal Reserve’s inflation battle look set to push the benchmark 30-year mortgage rate above 7%, according to strategists at BofA Global.

More than a decade of underconstruction in the US housing industry has put pressure on potential tenants and buyers. Today, analysts at one of Wall Street’s biggest banks say the imbalance complicates the Fed’s efforts to bring inflation down from a nearly 40-year high.

While the Fed’s aggressive interest rate hike in 2022 has already significantly cooled US stocks and bonds and pushed the US housing market into a recession, borrowing costs for households and businesses continue to rise. increase.

With shelter accounting for more than 30% of the consumer price index, “the Fed’s inflation-fighting problem is arguably getting worse,” wrote Chris Flanagan’s securitized products strategy team. at BofA Global, in a weekly client note.

Even though the Fed did not create the housing shortage, its rush to raise rates shocked bond yields and mortgage rates higher. This fueled an acceleration in “owners’ equivalent rent” (OER) inflation as homebuyer affordability plummeted, causing increased competition for renters, the team said.

The OER rate hit 8.9% in August (see chart) and is likely to remain a challenge for the Fed going forward, especially with the rental vacancy rate at 5.6%, the lowest since 1984, according to the BofA team.

High rents contribute to “sticky” inflation.

BofA Global

With no quick fix available for the housing supply problem, the BofA team said the Fed likely needs to “crush demand, which means crush employment,” to get inflation under control. .

Investors trying to navigate Monday’s market turmoil sold stocks and bonds, with the benchmark 10-year Treasury yield TMUBMUSD10Y,
3.876%
climbing to 3.878% on Monday, its highest rate since 2010, according to Dow Jones Market Data. Yields and bond prices move in opposite directions.

After more than doubling this year, the 30-year fixed mortgage rate was close to 6.87% on Monday, according to Mortgage News Daily. The benchmark rate last exceeded 7% in early 2002, according to data from Freddie Mac.

Fed Chairman Jerome Powell said last week that the housing market “is likely to undergo a correction to regain a better balance” after the central bank raised its benchmark rate another 75 basis points to a range of 3% to 3.75%, while signaling that it expects to see a midpoint of 4.4% by the end of the year.

See: The Fed Will Tolerate A Recession, And 5 Other Things We Learned From Powell’s Press Conference

The Dow Jones Industrial Average DJIA,
-1.11%
ended Monday in a bear market, marking its first decline of at least 20% from its peak in more than two years, while the S&P 500 SPX,
-1.03%
recorded its lowest close of 2022.

A positive sign, private real estate companies like Zillow Z,
-0.78%
have seen rent growth ease after an annual rise of about 17%, but that’s not the same housing data the Fed tracks to gauge inflation.

Lily: Rents fell in August for the first time since 2021, but they remain very high in these major American cities