“We would be wise to heed his warning,” Citi said. “Housing activity looks set to contract in Q2 after advancing only weakly in Q1. The rise in longer-term Treasury yields will weigh on residential investment and the broader economy.”
That’s as 30-year mortgage rates have crept back up toward 7% along with rising yields for Treasury bonds, which have been rattled by the worsening deficit outlook and tariff-laden inflation forecasts.
“Residential fixed investment is the most interest rate sensitive sector in the economy and is now signaling that mortgage rates around 7% are too high to sustain an expansion,” Citi said.
Other data add up to a strong message that the U.S. housing sector is contracting, according to the note, pointing to a decline in permits for single-family home construction and an increase in the effective supply of homes on the market amid weak demand, even during the peak spring selling season. Median home prices of existing homes are also falling on a monthly basis.
Meanwhile, price cuts and other incentives helped sales of new home unexpectedly surge in April, but sales for the first four months of 2025 are down 1.2% from the same period a year ago.
“The Federal Reserve will not respond to the housing market alone,” Citi said. “But if signs emerge that the weakness in housing in spreading – particularly to the labor market – the housing contraction may have the Fed considering a faster pace of cuts.”
