Here are two questions that few have yet asked about housing inflation: Is the Federal Reserve the cause of unrelenting upward pressure on single-family home prices and are they also the reason that the supply of existing single-family homes hovers near historic lows?
The simple answers to both questions, in my humble opinion, is yes!
Existing single-family home sales were 16.6% below those of a year ago while the inventory of unsold homes rose a bit to 3.3 months, but remain well below the average number of units available for sale during prior cycles.
Mortgage demand has, as a result of surging rates, dropped to a 27-year low to boot.
Economists are beginning, again, to worry that shelter costs are going to reaccelerate in the months ahead as higher mortgage rates and lack of available supply will push housing prices back up and greatly impact headline inflation rates.
Given extremely tight supplies of existing homes, it’s altogether possible that home prices may rise in the near future, putting upward pressure on inflation and causing concern at the Fed that it’s not doing enough to combat the rising cost of living.
But that assumes the higher interest rates are the cure but not the cause of rising shelter costs. Consider the following statistics from Redfin: “91.8 percent of homeowners with mortgages have a rate below 6 percent, 82.4 percent have a rate below 5 percent, 62 percent enjoy a rate below 4 percent, and 23.5 percent boast a rate below 3 percent.”
As Jessica Dickler wrote this week for CNBC.com, 82% of homeowners feel locked into their current homes due to low mortgage rates while adding that a 5.5% mortgage could be the key to unlocking their doors.
Those ultra-low mortgage rates, which have been largely in place since the Fed turned to zero interest rate policy both after the Great Financial Crisis in 2008 and again during the Covid pandemic in 2020, have, essentially, created a “stay-at-home” cohort of families who feel they can’t move.
That’s a post-Covid lockdown of a different sort.
Further exacerbating the problem is that the spread between 10-year Treasury yields and 30-year mortgage rates is currently around 3 full percentage points.
In more normal cycles, the spread is somewhere between 1.5 points to 2 points.
In short, if the Fed were to continue to raise rates amid concerns about rising shelter costs, those rising shelter costs would then become a self-reinforcing cycle, presumably forcing the Fed to continue hiking official interest rates which would push mortgage rights higher still.
This vicious cycle could create more inflation than it cures while the Fed fails to acknowledge, as it did with labor market tightness in a post-pandemic world, that this is more of a supply issue than a demand issue, although demand is certainly playing a role.
We simply need, not only to build more new homes — a boomlet is already underway — but also need to unlock the supply existing homes that emerging retirees, among others, would otherwise sell, either to trade down, or trade up, depending on where they are in their respective life cycles.
It also doesn’t help that private equity, and other institutional investors, have purchased hundreds of thousands of existing homes and converted them to rentals, a factor also limiting the supply of existing homes for sale on the market.
While there’s precious little the Fed, or any other arm of government, can do about that, it is also an issue that keeps home prices higher than they would otherwise be.
It’s clear that the days of 2-4% mortgages are over, as the Fed is unlikely to cut interest rates down to zero anytime soon. However, the Fed could do a lot to unlock the supply of homes by cutting official rates down to 4% (a hefty drop from here to be sure) which would reduce housing costs considerably and also exert downward pressure on measured housing inflation despite concerns to the contrary.
The central bank should also suspend “quantitative tightening,” or shrinking its balance sheet by, effectively, selling off its Treasury and mortgage bond holdings.
There are enough foreign sellers of U.S. Treasurys that upward pressure on rates is not coming from just a single source like the Fed.
It may be counterintuitive that lower rates could drive down inflation but, in this case, a counterintuitive policy may be exactly what is called for.
Chair Jerome Powell and company remain far too concerned about fueling a 1970s-style wage/price spiral by not raising rates fast enough, or high enough, to prevent such a recurrence.
With housing affordability currently spiraling out of control, the Fed, itself may be fueling inflation by fighting the wrong war at the wrong time with a focus on at least one wrong source.
Time for the Fed to see the world as it is, not as it was, and act accordingly or, at the very least, shelter rates in place for the remainder of the year.
Source : CNBC