A group of Democratic senators has called on the Fed to cut interest rates immediately to help restore America’s housing affordability.

“High interest rates have aggravated the country’s persistent crisis of housing access and affordability,” Senator Elizabeth Warren and three Democratic colleagues wrote in a Jan. 28 letter to Fed Chair Jerome Powell.

The senators said the Fed’s decision “to raise interest rates rapidly, and keep them high, has resulted in higher costs for home purchasers, higher rents, and reductions in new home and apartment building.”

“[W]e urge you to consider the effects of your interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach for too many,” the letter continued.

The central bank has hiked interest rates 11 times since early 2022, bringing the federal funds rate to a range of 5.25% and 5.5%. While relatively low by historical standards, that’s the highest level in more than two decades.

As a result, the 30-year mortgage peaked just below 8% in 2023—the highest in 23 years—leading to the worst year for home sales in almost three decades. Even then, prices didn't give out.

Experts say you can thank the Fed for this unusual home price resilience.

The affordability crisis has gotten worse

In a typical housing market, home prices tend to respond to changes in demand—that is, prices decline if there are fewer buyers. But not in today’s America.

Reason: low supply.

America's housing inventory is at one of the lowest levels. In fact, experts warn that America is short of between 3.2 million and 6.5 million residential properties.

Rising interest rates made the problem worse because most Americans financed their mortgages below 4%. They don’t want to sell their home and finance a new property at double the rate.

Experts call this the “golden handcuffs” effect.

According to the real estate listing website Zillow, homeowners are much more likely to list their properties for sale if rates are below 5%.

“When homeowners with low mortgage rates are hesitant to sell their homes, it results in a shortage of housing options, resale supply, homeowner mobility, and places upward pressure on housing prices,” Zillow said in a report.

As long as rates remain above that level, the supply of new properties on the market is unlikely to increase in any meaningful way.

“Prices aren’t falling because the market is stuck,” according to Joe Seydl, senior markets economist with JPMorgan Chase.

“Demand has been reduced by high mortgage rates, but supply is even more restricted because of severe underbuilding in the 2010s, relative to population growth,” he explained.

Is the worst over?

As interest rates plateau and builders increase production, the worst of the housing crunch may already be in the rearview mirror, experts say.

“As home builders ramp up production, more supply will reach the market,” said Lawrence Yun, chief economist at the National Associaton of Realtors.

“Home price appreciation can only moderate from drastically improved supply. Another 30% rise in home construction can easily be absorbed in the marketplace, especially in light of recent weeks’ plunge in mortgage rates,” he said.

Mortgage rates have already declined by more than one point from their October peak and could be set to fall even further as the Fed finally begins cutting rates.

The Fed is widely expected to slash interest rates three times this year, although several Wall Street firms think the central bank will have to resort to more drastic cuts to stave off a recession.

In other words, the senators may get their wish after all.

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