1. Federal Reserve Being Squeezed into Rate Cuts by Weak Housing Market?
The Federal Reserve has two primary objectives (known as the dual mandate): maximum employment and price stability (controlling inflation). On the surface, this mandate appears to be simple. But each of those objectives have complex factors that shape performance and there are multiple strings that the Fed can pull to stimulate or slow down growth. For instance, to provide an environment for maximum employment, the economy must be growing at a controllable pace and monetary policy must be “accommodative” for growth. To maintain full employment, the Fed is often forced to consider other economic factors that drive hiring. Healthy GDP growth is one way to achieve a full employment mandate. And likewise, slowing GDP should be a concern for the Fed. The labor market tends to be a lagging indicator. By the time data shows pressure building in the labor market, the damage has already been created from the broader economy.
Lately, the Fed has allowed fear of tariff-induced inflation to dictate its decision-making. The Board of Governors is anticipating that tariffs will keep inflation well beyond the Fed’s target rate of 2% and has decided to keep interest rate policy unchanged. But pressure is building against GDP growth as the US housing market shows signs of stress. High interest rates and elevated construction costs have pushed many home buyers out of the market. The months of supply of new homes have recently eclipsed 9.8 months of inventory on hand, which is the highest level since the Financial Crisis during the Great Recession (barring a short period during the pandemic). New single-family home starts are down 10% Y/Y and permits for new projects are also down 8.4% Y/Y.
With residential construction accounting for 15-16% of US GDP contribution (from both direct and indirect spending), a weaker housing market can become a drag on the overall economy. At some point in the next quarter, the risks emanating from a weaker housing market may override fears of tariff-induced inflation. The Fed still has two quarter-point interest rate cuts built into its 2025 projection and for the first time since the 1990’s, there were two dissenting views among the Board of Governors on interest rate policy in its last meeting.
Additional Reading: Latest Federal Reserve Statement
2. Higher Income Households Start to Worry About Job Security
Technology and advancements through Artificial Intelligence (AI) are exciting, but they can also create some trepidation and affect spending patterns. Much of the real estate market is driven by the upper 40% of households, many of which are anchored by higher education or skilled training jobs with steady income growth potential. These are also segments that are impacted most directly by adoption of artificial intelligence. Challenger, Gray, and Christmas found that 10,000 jobs were shed in July 2025 alone due to generative AI and more than 27,000 to date have been lost. These types of headlines (although they represent just a small fraction of overall employment) have an effect on sentiment and consumer spending.
Survey data conducted recently found that upper income households were reducing splurges on luxury goods (corroborated by many high-end luxury retailers), were making more economical choices and trading down on brand choice (looking for more affordable products), and they were beginning to show hesitancy in real estate. The housing market is experiencing some of this as affluent buyers are downsizing purchases or simply waiting to make a move.
Only a fraction of the population will eventually be impacted negatively by AI. But headlines such as “30% of current U.S. jobs could be automated by 2030” is creating some uncertainty. And with the rapid explosion of AI utilization in the workplace, even if it does not eventually lead to worker replacement, in the interim it is having an impact on sentiment and ultimately spending.
But as in other phases like this, consumers will quickly get beyond this fear and trepidation (and historically it has happened quickly) and spending can recover just as fast. In the meantime, recognizing the trend is part of the battle in explaining why some real estate segments are sluggish compared to historical performance. Easing interest rates will help with affordability (especially for student loans, credit card, and automotive debt), but the trickle down into the bond markets will also reduce mortgage rates and spur some risk taking.
Source: AI Trends
