Fed Rate Cuts Should Deepen the Secular Housing Crisis in America
The cost of housing remains a hot-button topic with both Millennials and Gen-Z. Plenty of articles and commentaries address the concern of supply and affordability, with the younger generations getting hit the hardest. Such was the subject of this recent CNET article:
“The housing affordability crisis means it’s taking longer for people to become homeowners — and that’s especially impacting millennials and Gen Zers, economically disadvantaged families, and minority groups. There’s not one single driver of the crisis, but several colliding elements that put homeownership out of reach: rising home prices, high mortgage interest rates and limited housing supply. That’s on top of myriad financial challenges, including sluggish wage growth and increasing student loan and credit card debt among middle-income and low-income Americans.”
The chart below of the housing affordability index certainly supports those claims.
As noted by CNET, there are many apparent reasons causing housing to be unaffordable, from a lack of supply to increased mortgage rates and rising prices. Over the last couple of years, as the Fed aggressively hiked interest rates, the supply of homes on the market has grown.
Such is because higher interest rates lead to higher mortgage rates and higher monthly payments for homes. It is also worth noting that previously when the supply of homes exceeded eight months, the economy was in a recession.
At the same time, higher interest rates and increased supply should equate to lower home prices and, therefore, create more “affordability.” As shown, such was the case in prior periods, but post-pandemic housing prices skyrocketed as “stimulus checks” fueled a rash of buyers.
As is always the case with everything in
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