Powell to Congress: Higher rates are “the absolute best thing we can do for the housing market…” – “…particularly for younger people who are not yet in the housing market.”
However we want to interpret this, it’s fascinating. Powell told Congress on Tuesday: “There’s no question that higher interest rates are making it harder to buy homes in the short term. But in the longer term, this is the best thing, particularly for younger people who are not yet in the housing market.”
Did he mean that younger people would benefit from lower home prices, or at least an end-of-the-home price increases, and that higher rates are going to accomplish that? I don’t know. To speak that truth would be, sacrilege.
“Higher interest rates” means higher than they used to be, so even if the Fed cuts its rates a few times in the future, they’d still be much higher than before the pandemic, and mortgage rates would still be much higher as well.
The purpose of the higher rates is to “get back to 2% inflation for the whole economy,” he said, according to MarketWatch, “so that the housing market can be on a better foundation.”
These higher rates are “the absolute best thing we can do for the housing market and for the economy [so as] to sustainably bring inflation back down, so that people aren’t talking about it anymore,” he said.
Higher for Longer: 7% mortgages a year so far.
According to the Mortgage Bankers Association today, the average conforming 30-year fixed mortgage rate was 7.0% in the latest reporting week.
ADVERTISEMENT
The 7% mortgage has been a fixture in the housing market for a year. This measure of the average mortgage rate has hovered around 7% since July 2023, ranging from 6.75% at peak-Rate-Cut Mania in January 2024 to 7.9% in October 2024. It has been above 6% since September 2022.
People who financed a home purchase with mortgage rates at 6% or 7% or over 7% since September 2022, hoping that they would be able to refinance that mortgage quickly into a 4% mortgage, have gotten stock with their mortgage payments.
These new homeowners with 7% mortgages and big mortgage payments may be forced to cut back spending on other goods and services, thereby lowering demand for those goods and services. The Fed is counting on them to do that. They’re one of the official transmission channels of Fed policy rates to the overall economy, to lower demand, and thereby lower inflationary pressures.
Potential homebuyers today have to do the same calculus: When will mortgage rates drop far enough to make it worthwhile refinancing a 7% mortgage, given the points and expenses involved in a refi? This is a tough call – especially since renting an equivalent house is now a lot less costly on a monthly basis.
Compared to the pre-QE era, a 7% mortgage rate is not breaking new ground: From 1970 through 2001, mortgage rates ranged from 7% to 18%. Lower home prices made those higher mortgage rates work.
But ultra-low mortgage rates fuel housing bubbles. When mortgage rates dropped as low as 5.5% in 2005, they fueled Housing Bubble 1, which led to the Housing Bust from 2006-2012. The pandemic-era below-3% mortgages did a wonderful job inflating housing prices in a historic manner.
But now, these 7% mortgages conflict with the too-high prices. And something has to give…..
*****
Continue reading at Wolf Street.
