Ron Insana: The two ways the Fed is hammering the U.S. housing market

Here are two questions that few have yet asked about housing inflation: Is the Federal Reserve the cause of unrelenting upward load on single-family home prices and are they also the reason that the supply of existing single-family homes hovers neighbouring historic lows?

The simple answers to both questions, in my humble opinion, is yes!

Existing single-family home sales were 16.6% on earth those of a year ago while the inventory of unsold homes rose a bit to 3.3 months, but remain well below the as a rule number of units available for sale during prior cycles.

Mortgage demand has, as a result of surging rates, omitted to a 27-year low to boot.

Economists are beginning, again, to worry that shelter costs are going to reaccelerate in the months winning as higher mortgage rates and lack of available supply will push housing prices back up and greatly consequences headline inflation rates.

Given extremely tight supplies of existing homes, it’s altogether possible that where it hurts prices may rise in the near future, putting upward pressure on inflation and causing concern at the Fed that it’s not doing sufficiently to combat the rising cost of living.

But that assumes the higher interest rates are the cure but not the cause of rising protect costs. Consider the following statistics from Redfin: “91.8 percent of homeowners with mortgages have a reckon below 6 percent, 82.4 percent have a rate below 5 percent, 62 percent enjoy a rate cheaper than 4 percent, and 23.5 percent boast a rate below 3 percent.”

As Jessica Dickler wrote this week for CNBC.com, 82% of homeowners undergo 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 capture rate policy both after the Great Financial Crisis in 2008 and again during the Covid pandemic in 2020, hold, essentially, created a “stay-at-home” cohort of families who feel they can’t move.

That’s a post-Covid lockdown of a different category.

Further exacerbating the problem is that the spread between 10-year Treasury yields and 30-year mortgage rates is currently about 3 full percentage points.

In more normal cycles, the spread is somewhere between 1.5 points to 2 points.

In uncivil, if the Fed were to continue to raise rates amid concerns about rising shelter costs, those rising accommodation costs would then become a self-reinforcing cycle, presumably forcing the Fed to continue hiking official interest computes which would push mortgage rights higher still.

This vicious cycle could create multifarious 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 assorted of a supply issue than a demand issue, although demand is certainly playing a role.

We simply need, not only to set up more new homes — a boomlet is already underway — but also need to unlock the supply existing homes that emerging retirees, mass others, would otherwise sell, either to trade down, or trade up, depending on where they are in their special life cycles.

It also doesn’t help that private equity, and other institutional investors, have obtained hundreds of thousands of existing homes and converted them to rentals, a factor also limiting the supply of existing shelters 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 outflow that keeps home prices higher than they would otherwise be.

It’s clear that the days of 2-4% mortgages are to the ground, 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 biting official rates down to 4% (a hefty drop from here to be sure) which would reduce quarters costs considerably and also exert downward pressure on measured housing inflation despite concerns to the contrary.

The medial bank should also suspend “quantitative tightening,” or shrinking its balance sheet by, effectively, selling off its Treasury and mortgage checks holdings.

There are enough foreign sellers of U.S. Treasurys that upward pressure on rates is not coming from due a single source like the Fed.

It may be counterintuitive that lower rates could drive down inflation but, in this example in any event, a counterintuitive policy may be exactly what is called for.

Chair