Fed Gov. Michael S. Barr highlighted the growing disconnect between everyday Americans' earnings and housing expenses.
A top Federal Reserve official has delivered a sobering assessment of the U.S. housing market, warning that a severe housing shortage is driving up shelter costs at a time when the central bank may be forced to raise interest rates even further.
Speaking at an event in Chicago on Wednesday, Fed Gov. Michael S. Barr highlighted the growing disconnect between everyday Americans' earnings and housing expenses.
“By a variety of measures, high rents and high home prices, relative to income and savings, have made shelter increasingly unaffordable for many Americans for a number of years,” Barr told attendees at a housing summit hosted by the Chicago Fed.
Barr noted that an Atlanta Fed index tracking the affordability of homeownership, as measured by the ratio of home prices to incomes, hit a 21-year low this summer. And that's before factoring in the impact of higher mortgage rates, which have been climbing since the spring and exceeded 7% on Thursday, according to Freddie Mac.
"Real, constant-quality house prices are at a record high in many places around the country," said Barr. "This combination of high prices and high rates puts homeownership out of reach for many families."
Barr cited a number of factors contributing to the housing affordability crisis, including onerous regulations and zoning policies that constrain homebuilding, a lack of productivity growth in the homebuilding sector, decades of under-building following the subprime mortgage crisis, and high inflation for construction materials.
The Fed official also cited prior research from Realtor.com® senior economists Hannah Jones and Jake Krimmel examining the "lock-in effect" of higher mortgage rates, which can discourage homeowners from moving if it would mean giving up ultralow rates.
"About half of all mortgages still carry rates of 4% or lower, and nearly 80% have a rate below 6%," Barr noted. "In tight housing markets, the lock-in effect can raise home prices because the reduction in housing supply associated with fewer homeowners selling can outweigh the corresponding reduction in demand."
As a result, Barr said that prospective homeowners "face higher prices for homes, higher mortgage rates, higher home insurance costs, and higher property taxes."
Recent research from Realtor.com estimated the nation's housing supply gap at more than 4 million units, a shortfall that has resulted from more than a decade of building fewer homes than are needed to meet demand.
"Barr's broad assessment of the housing market is on the money—especially on affordability," Krimmel adds. "Land use and zoning is upstream of everything, as he hints at."
(Realtor.com) Market braces for further Fed rate hikes
Last week, Fed policymakers voted to increase the benchmark interest rate by a quarter-percentage point in response to persistent inflation, marking the first rate increase in three years.
Barr in his remarks noted that he supported the decision, which received unanimous backing from the 12 voting members of the Federal Open Market Committee. He also said he views future hikes as likely.
"In my view, given changes to the economy, we were out of position, and we made an adjustment in the right direction," he said. "In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion."
The next Fed policy meeting is scheduled for late October, and financial markets now see a 70% probability that the FOMC will increase the overnight rate at that time, according to CME FedWatch.
"It looks increasingly likely the Fed will hike at least once before the end of the year, and maybe as early as next month," says Krimmel.
The Fed uses higher interest rates to fight inflation and lower rates to stimulate the job market, in line with the central bank's dual mandate of price stability. Although the Fed doesn't set mortgage rates directly, those rates are influenced by investor expectations about inflation and Fed policy.
"Our short-term policy rates affect longer-term borrowing rates, including those for mortgages, but many other things affect mortgage rates as well," Barr acknowledged in his speech. "Mortgage rates are generally lower when inflation is lower, and we are working toward that goal."
Mortgage rates have been rising steadily since early March, when the U.S. war with Iran sent global oil prices surging.
"It's hard to know where mortgage rates will peak since the 10-year Treasury yield, which mortgage rates largely follow, responds not only to Fed policy changes but also to global trends in supply, demand, and finance," says Krimmel.
However, recent Realtor.com research on mortgage rate volatility found that mortgage rates tend to stay within a 50-basis-point band (or half a percentage point) over a three-month period. A historical analysis found that range to be accurate almost 80% of the time.
"What buyers should also pay attention to—and try to leverage—is asking prices on homes for sale," says Krimmel. "Rates are just one factor behind affordability. Negotiating a lower home price can often more than offset higher financing costs."