High Mortgage Rates: Who’s to Blame?

The current high mortgage rates have become a significant issue for both home buyers and sellers. Some lawmakers and administration officials are questioning whether the Federal Reserve is responsible for these high rates. Recently, Federal Reserve Chair Jerome Powell faced criticism from lawmakers and White House officials after the central bank decided to hold its federal funds rate for the fourth time this year.

The Impact of Federal Funds Rate on Mortgage Rates

The federal funds rate has a significant influence on interest rates for various types of personal loans, including mortgage rates. However, mortgage rates do not always move in tandem with the Fed’s key benchmark rate. Currently, mortgage rates are hovering around 6.8%, which is well above the 2020 levels when home borrowing costs fell below 3%. This has created a "lock-in" effect, where sellers are reluctant to list their homes and give up their low mortgage rates for higher ones.

Powell’s Testimony

During his recent congressional testimony, Powell stated that it’s not obvious that lowering interest rates would lead to lower housing inflation. He argued that lower rates would increase housing demand, which would unlock people’s low mortgages, creating both buyers and sellers. Powell also warned that high housing costs may be around for a while, even after the Federal Reserve eventually lowers interest rates.

Mortgage Rates Are Just One Aspect of Affordability

Mortgage rates are not the only factor contributing to high housing costs. Low inventory has pushed home prices higher in recent years, with the median U.S. home price reaching a record $396,500. The long-term housing shortage in the U.S., which started after the 2008 housing crisis, has created a housing market that is short nearly 4 million homes to meet demand.

The Housing Supply Issue

Powell resisted the idea that lower interest rates would lead to improvements in the housing supply and, thus, lower housing prices. He noted that even when short-term rates are down to normal, housing costs will still be high due to factors such as high insurance costs, material costs, labor shortages, and other factors that drive housing prices up across the country.

Conclusion

In conclusion, the issue of high mortgage rates is complex and multifaceted. While the Federal Reserve’s federal funds rate has an impact on mortgage rates, it is not the sole culprit behind high housing costs. The long-term housing shortage, low inventory, and other factors contribute to the high prices. As Powell noted, even with lower interest rates, housing costs are likely to remain high due to various factors. Therefore, addressing the housing supply issue and other underlying factors is crucial to making housing more affordable for buyers and sellers.