The Fed may raise rates by less than expected in November as the housing market is in a deep recession

According to Pantheon Macroeconomics, the Federal Reserve may deliver a smaller rate hike than investors think in November.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote that the parlous state of the housing market is a key factor in their forecast.

The sector can roll over without triggering a wider economic recession because it accounts for less than 10% of the GDP. The housing market is in a deep recession and the pain will spread beyond homebuilders soon, he warned.

The housing recession will exert more pressure on the Fed to dial back the pace of tightening.

The fed funds rate is expected to be raised by 75 basis points on Wednesday, the third time in a row that the fed funds rate has been raised. 30-year mortgage rates have risen for the first time since 2008 after the Fed raised interest rates four times in a row.

Heading into Wednesday's policy meeting, the fed funds rate ranged from 2% to 2.5%. The Fed will meet on November 2 and 3.

Sentiment among homebuilders fell for a ninth month in a row in September, according to the National Association of Home Builders. The Housing Market index produced with Wells Fargo fell to 46, the lowest level since the spring of 2020 when the COVID epidemic began.

Jerry Konter, Chairman of the NAHB, said that high mortgage rates and home prices are putting a new home purchase out of reach for many households.

More than half of the builders in our survey use incentives to bolster sales, including mortgage rate buy downs, free amenities and price reductions.

Shepherdson said that the Housing Market Index's decline has slowed in recent months but the latest report probably doesn't mark the floor. The early September numbers are grim even before the full hit from the rebound in mortgage rates in recent weeks works through.