In an effort to address the inflation problems, the Federal Reserve has been on a march to higher interest rates. This powerful counter action over the last year has had unintended consequences and has lead to a housing deficit. It is impacting millions across the country and will take a generation to resolve unless the Federal Reserve takes some counter actions.
When the Federal Reserve pushed long term mortgage rates into the 2’s, it failed to realize that it would create a future housing conundrum where millions of homeowners could ill-afford to sell their home and move into a smaller home, but yet pay more for it. That is exactly what has happened. Most homeowners are unable to purchase the very home they currently live in because the interest rates are so much higher, they could not afford the payments.
Since more homeowners cannot afford to move, less homes come onto the market. With less homes on the market, less number of new homebuyers can afford to purchase a home. Which leaves home prices artificially high because less homes are coming on to the market.
The Federal Reserve thinks it is curtailing housing inflation, when if we really look at it, it is actually adding to it.
What Needs to Be Done?
The Federal Reserve needs to try and help mortgage rates come back to a normal range. U.S. Treasury interest rates are currently between 3.90%. The normal spread between U.S. Treasury rates and mortgage rates is about 1.75%, which would put mortgage rates at around 5.65%. But that is not happening. Demand is building up and when rates do come down, home prices will shoot up because the demand has been stifled for a period of time. It is not like young families can rent forever.
The current spread between U.S. Treasury interest rates and mortgage rates are at historic highs around 3.00%. That makes the mortgage rates be around 6.90%. The difference in payment for a $450,000 mortgage is $365 a month in principal and interest ($2,965 vs $2,598). That is a lot of money.
The Federal Reserve needs to lower mortgage rates through a commitment not to sell their mortgage securities, held by the Federal Reserve, on the market for the foreseeable future. It is driving up mortgage rates to unhealthy levels. It also need to work the monetary policies that will lower the mortgage rates to healthy levels.
Failure to act now will lead to future and more challenging housing crisis down the road. The Federal Reserve will just be chasing fires from one house to the next without end.
And we will have a growing number of potential homebuyers who will be renters for many more years.