Despite August's Consumer Price Index (CPI) data revealing an increase in shelter costs, CoreLogic's annual US home price growth study highlighted that the housing market cooled during the summer months.

UBS senior economist Brian Rose joins Seana Smith and Brad Smith to discuss the state of the housing market and what it means for the Federal Reserve as it weighs the amount of its first interest rate cut.

Rose notes that overall, housing remains relatively unaffordable: "The combination of very high housing prices and high mortgage rates is making housing extremely unaffordable. So we haven't seen anything like this since the early 1980s, when the fed funds rate was up near 20%. Very, very unaffordable."

He explains that increased supply will bring much-needed relief to the market as it struggles with a "fundamental housing shortage." While an interest rate cut from the Federal Reserve could help bring mortgage costs down, he argues, "rents and housing in general will remain unaffordable until we increase the supply."

As all eyes are on the September FOMC meeting, Rose notes that the Fed is in a "very difficult situation" as the economic data "has become less reliable since the pandemic." He explains that the data has become more noisy, and there are more revisions and discrepancies between estimates.

Thus, he believes that the Fed's main focus will be on the labor market as it weighs the rate-cutting path ahead: "The inflation data itself doesn't add urgency to rate cuts, but would add urgency is deterioration in the labor market — especially layoffs. So right now, what you see is hiring has slowed new entrants are struggling to find a job. But the layoffs remain low. You can see initial jobless claims is still low. But if you start seeing those layoffs taking off, the Fed will get very concerned that it's behind the curve."

Because layoffs are still low at this moment, Rose expects a 25-basis-point cut in September.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Melanie Riehl