One challenge for the Federal Reserve is that its policy has an immediate and significant impact on financial markets but a much more limited and delayed impact on the 'real economy'.

This is evident based on the Fed's easing efforts throughout the last decade which included zero rates and adding trillions in assets to its balance sheet in an effort to accelerate the labor market's recovery and ignite wage inflation.

Now, the Fed is shedding assets and aggressively hiking rates in an effort to slow wage inflation and tamp down on inflation but having limited and only moderate success.

But, one channel where its policy impact is immediately felt is the housing market due to mortgage rates being driven by longer-term rates. Currently, mortgage rates are nearing 7% while they were flirting with 2% in the post-pandemic era which saw record-low rates.

This has stopped the bull market in housing in its tracks with signs of prices starting to decline in certain markets. However, even with lower prices, affordability has gone down more due to higher rates.

There's no indication of improvement coming anytime soon as the Fed is unlikely to pivot anytime soon and unlikely to stop hiking anytime soon. Inflation and the economy have proven to be more intractable than thought a few months ago and immune to the effects of higher rates.

This means more damage to the housing market. The Fed will pivot if inflation starts to come down on its own. While there has been some moderation in terms of headline inflation, there is none in core inflation which has plateaued at an unsustainably high rate.

Thus, the trend of bad news in the housing industry should continue. The latest NAHB survey which is an important leading indicator of housing activity showed that homebuilder sentiment declined for the 10th month in a row and was the lowest reading since August 2012. That negative trend was reversed in part due to low rates that persisted for nearly a decade.

Now, the rate outlook is less likely to be so sanguine. One salvo for homebuilders has been that there was a huge backlog which continues to be completed. Currently, the S&P Homebuilders ETF (XHB  ) is down 33% YTD which is significantly more than the S&P 500's (SPY  ) YTD loss of 21%.