From the NYT:
The Federal Reserve’s relentless attack on inflation is jeopardizing our housing market. The resulting damage is not only having an impact on a critical engine of economic growth but is also, ironically, undermining the war against inflation as well.
Resolving an unusual problem requires an unusual solution. The Fed should immediately reverse course and buy mortgage securities to help moderate consumer mortgage rates. It can keep selling Treasury bonds if it so chooses. This will allow the Fed to raise non-housing interest rates, if necessary, while also allowing the housing market to resume functioning normally again.
As fears of Covid waned and the engines of the economy restarted with a bang, concerns about runaway inflation prompted the Fed to embark on one of the most extreme changes in prevailing interest rates in history. The central bank raised its key federal funds policy interest rate to a level about 22 times what it was previously in less than 18 months. Only during the rapid inflation of the late 1970s, when the Fed under its chairman Paul Volcker raised the effective federal funds rate to nearly 20 percent in 1980, has an increase come even close. (And that Fed only roughly doubled rates, not increased them 22-fold.)
In normal times, higher Treasury rates, which make mortgages more expensive, divert household income to mortgage payments and away from other purchases, dampen home buyer demand and, ultimately, lower home prices. Lower home prices reduce homeowners’ wealth, further lowering their spending. And home purchases are such a powerful component of the overall economy — think of everything a new homeowner might need — that making it harder to buy homes helps cool off the rest of our $27.6 trillion economy.
The problem is, these aren’t normal times. Recently, the average interest cost on a 30-year, fixed-rate mortgage neared 8 percent.Less than two years ago, it was about 3 percent, and most homeowners refinanced then or at earlier lows around 2016. The jump in rates has been so unusually large and came on so unusually fast that many homeowners who may want to move suddenly cannot do so because even downsizing could result in a substantially higher monthly mortgage payment. As a result, the U.S. owner-occupied housing market is now experiencing both a mobility and an inventory crisis.
In September, the pace of existing-home sales fell below four million on an annualized basis to a level unseen since the early 1990s, other than during the Great Recession and the pandemic lockdowns. With so few homes being put on the market for sale, the normal effect of higher interest rates — a gradual reduction in home prices and dampening of associated inflation — is simply not able to happen.
There’s more: When owner-occupied homes aren’t made available for sale, and prices therefore can’t adjust downward, more people are forced to rent. And with more households dumped into the rental market, rental prices rise — which is what they have been doing in recent months, defeating the Fed’s effort to beat inflation.
With residential rent making up approximately 33 percent of total and 42 percent of core Consumer Price Index inflation, excluding volatile food and energy prices, the cost of housing has been driving inflation for nearly all of 2023 (and remains potent regardless of what Tuesday’s Consumer Price Index data for October may suggest). In September, if housing prices had not risen, core inflation for the month would have been zero.
It is an irony that the Fed’s effort to tamp down inflation is causing an increase in core inflation measures. And while the Fed is chasing its own tail, other avenues for controlling inflation have weakened considerably as a result of the unique circumstances surrounding the pandemic.