The housing market will drag the economy into a hard landing unless the Fed takes these 'simple steps,' trade groups warn

• Housing trade groups urged the Federal Reserve to stop hiking interest rates immediately.
• The NAHB, MBA, and NAR warned that a hard landing is likely, unless the Fed takes two "simple steps."
• More rate hikes would pose broader risks to growth, "heightening the likelihood and magnitude of a recession."

The Federal Reserve needs to take two "simple steps" to assure that it sticks a soft landing in the economy, according to three housing industry trade groups.

The National Association of Home Builders, the Mortgage Bankers Association, and the National Association of Realtors warned Fed Chair Jerome Powell in a letter on Monday that further interest rate hikes would virtually guarantee a hard landing in the form of a recession.

The trade groups highlighted that the spread between 30-year mortgage rates and the 10-year Treasury yield is at historic levels, "signaling deep-seated uncertainty about where the Fed is headed."

"Further rate increases and a persistently wide spread pose broader risks to economic growth, heightening the likelihood and magnitude of a recession," the letter warned.

The trade groups pointed out that housing activity accounts for an estimated 16% of GDP in the US. And an abrupt slowdown in new and existing home sales is likely to have trickle-down effects for the broader economy if a sales rebound doesn't happen soon.

To remedy the current situation, the trade groups urged the Fed to make two statements:

1. "The Fed does not contemplate further rate hikes;"

2. "The Fed will not sell off any of its mortgage-backed securities holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized."

The Fed has been reducing its balance sheet by rolling off and not reinvesting as much as $60 billion in Treasury bonds and as much as $35 billion in mortgage-backed securities every month.

While the central bank hasn't been selling assets outright, this so-called quantitative tightening process has trimmed its balance sheet by about $1 trillion from the $9 trillion peak in March 2022.

"These steps will provide the market greater certainty about the Fed's rate path and its plans for the MBS portfolio and reduce volatility for traders and investors," the letter argued.

Those two steps would also likely help improve home builder sentiment, which would go a long way in helping get new supply of homes to the market.

And increasing home supply would help bring down the inflationary shelter costs that have driven inflation higher over the past year.

"We urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid," the letter concluded.