Rising mortgage interest rates will aggravate housing affordability challenges in 2022 and higher inflation and business costs, as well as a tightened Federal monetary policy, will likely slow overall growth in 2022, according to NAHB chief economist Robert Dietz. In the a post on NAHB Now, Dietz writes that while a recession is not forecast to occur in 2022, the “risk of recession next year is rising.”

Similar to what occurred in 2018, higher mortgage rates will slow sales and construction in an otherwise positive demand-side environment. For example, in the March NAHB/Wells Fargo Housing Market Index reading of builder sentiment, the measure of future sales expectations fell a notable 10 points for the month. Since the start of the year, the average 30-year fixed-rate mortgage increased from 3.1% to 4.67% by the end of March — the fastest rate increase in percentage terms in decades.

New home sales in February reflect the impact of only about half of this expansion for mortgage rates. Nonetheless, sales slipped 2% from January to February, registering a 772,000 seasonally adjusted annual rate. This is 6.2% lower than a year prior, with pricing up 10.6% year-over-year. It is worth noting that some of this sales decline is due to builders deliberately slowing sales to help counterbalance supply-chain delays.

The Fed’s intended aggressive policy path for higher rates would guarantee an economic slowdown and risk an outright recession in 2023. To engineer a soft landing, tightened monetary policy must be complemented with fiscal and regulatory policy that helps ease the economy’s myriad supply-side challenges.