A housing crisis is the stick the White House has selected to beat Fed chairman Jerome Powell with. “Could somebody please inform Jerome ‘Too Late’ powell that he is hurting the housing industry, vrey badly?” the president wrote on Truth Social earlier this year. “People can’t get a mortgage because of him.”
Elsewhere,Trump’s housing chief called Powell a “maniac,” and Treasury Secretary Scott Bessent placed the blame for a property squeeze at the Fed’s feet. He argued: “The biggest hindrance for housing is mortgage rates. If the Fed brings down mortgage rates, then they can end this housing recession.”
If only it were that simple.
While the fed is in control of the short-term interest rate-which can influence mortgages in the longer run to some extent-the market is demonstrating that lenders have rarely cared less about what the Federal Open Market Committee (FOMC) is doing.
“Despite 125 basis points of Fed cuts since September 2024, the spread between mortgage rates outstanding and new mortgage rates is over 2%, the highest in 40 years, indicating that more cuts may be necessary to spur housing activity,” Morgan Stanley wrote in a note at the end of October, before Powell delivered another cut.
Even then, mortgage rates have barely wobbled and still sit stubbornly at around 6.2%.
Powell’s-or indeed his successor’s-influence over the property market won’t return any time soon, warned economists. While the outcome of the FOMC’s cutting regime could spur spending, for savers desperately stockpiling for that all-important deposit, lower rates are only adding salt to the wound.
housing has been the Fed’s fault-but not right now
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The Fed’s policy at present can’t be blamed for the state of the housing market, argues Dr David Kelly, chief global strategist and head of the global market insights strategy team for JP Morgan Asset Management.It’s the Fed’s actions in the past that are the problem.
“The Fed can be faulted for its behavior regarding the housing market for many years, but the real fault is not that they are keeping rates too high today, it is that they kept rates way too low, for way too long, after the great financial crisis,” Kelly tells Fortune in an exclusive interview.
Between the end of 2008 and late 2015 the U.S. base rate was effectively zero, before climbing to approximately 2.4% in 2019, before being dramatically axed again because of the COVID pandemic. This resulted in “abnormally low mortgage rates” which were maintained for a sustained period of time, Kelly added, “it encouraged everybody to buy a house and to bid up prices.”
He explained: “The question was never how much is this house worth, but how much can you afford? If mortgage rates are 3%, people could afford a lot.When the Federal Reserve normalized rates, they sort of snapped the trap shut.”
Buying a home has become increasingly unaffordable for first-time buyers, even in the past few years. Per data from the National Association of Realtors,in 2022 its
K-Shaped Economy and Housing Affordability: Beyond Monetary Policy
The current economic landscape,increasingly described as K-shaped,presents a unique challenge to housing affordability. While federal policy plays a role, experts emphasize that addressing this issue requires a broader focus on factors driving the real economy, notably at the state and local levels. The diverging fortunes of the wealthy and those with lower incomes are exacerbating housing pressures, especially for first-time homebuyers like Gen Z and Millennials.
The Limits of Federal Intervention
While the Federal Reserve (Fed) influences mortgage rates and access to leverage, its power to directly fix the underlying issues impacting house prices is limited. Experts like Liam Bailey, Global Head of Research at Knight Frank, point to several key factors outside the Fed’s control. These include the difficulty of saving for a down payment, a constrained housing supply, and increased household incomes over the past 50 years due to societal shifts like increased female workforce participation. https://www.knightfrank.com/
“Anyone who’s entering the market for the first time is probably most affected,” bailey stated in an interview with Fortune.
State and Local Policies: A Critical Component
A notable obstacle to affordability lies in state and local policies. According to experts, housing red tape – encompassing zoning regulations, affordable home quotas, building codes, and tax frameworks – “drastically impact” where people can live. Addressing affordability, thus, requires acknowledging the influence of these local-level factors.
“It’s critically important when we’re thinking about affordability to acknowledge that it’s not just the federal government… yes, they play a primary role in people’s access to leverage to getting that mortgage and to lever up to buy a home, but to make it affordable, it’s also what’s happening at the local level right from a zoning, tax, and policy angle,” explained one expert.
The “Locked-In” Homeowner Effect
Another significant friction point in the market is the disincentive for existing homeowners to sell. Many homeowners secured historically low mortgage rates (around 3%) in recent years. With current interest rates around 7%, moving to a new home would mean considerably higher monthly payments.
Bailey explains, “The problem comes when you have an interest rate shock like we’ve had recently. The market just basically closes down as why would anyone move off thier 3% fixed to a 7% mortgage by moving house? They just wouldn’t, so they don’t move and then the whole thing just grinds to a halt.” This reluctance to sell further constricts housing supply, exacerbating affordability issues.
Income Inequality and the “Have-Nots”
The challenges in the housing market are particularly acute for those on the lower end of the income spectrum. Income inequality is considered an “incredibly important issue,” and those with fewer resources “may feel the greatest pressure” in a K-shaped economy. This disparity highlights the need for policies that address both housing supply and income distribution to ensure broader access to affordable housing.
Looking Ahead
Addressing the housing affordability crisis requires a multi-faceted approach. While monetary policy has a role, focusing on streamlining local regulations, increasing housing supply, and addressing income inequality are crucial steps toward creating a more equitable and accessible housing market for all.