4.4 C
Washington

Jerome Powell says ‘the housing market is in a very challenging situation right now’ and interest rate cuts alone won’t solve a long-running inventory crisis

Date:

Share:



The housing market has a problem—millions of them. The country is short between 3.5 and 5.5 million housing units, according to various estimates. The roots of the shortage go back to the aftermath of the Global Financial Crisis, when cautious developers were hesitant to invest in new construction and set a precedent of undersupply that’s continued to now. Jerome Powell. 

On Thursday, the Federal Reserve chair testified to the Senate Banking Committee against the backdrop of his recent decision not to cut interest rates, the big question investors and homebuyers are asking. Potential rate cuts have given investors hope about some much-needed relief for the housing market, which has struggled to cope with soaring mortgage and refinancing rates, but Powell testified that the housing market’s real problems run much deeper—and it will take more than just monetary policy to fix them.

 “The housing market is in a very challenging situation right now,” Powell said on Capitol Hill on Thursday. “Problems associated with low rate mortgage [lock-in] and high [mortgage] rates and all that, those will abate as the economy normalizes and as rates normalize,” he said, referring to the mismatch between something approaching 90% of homeowners with mortgage rates below 6% and the current market offering above 7%. “But we’ll still be left with a housing market nationally, where there is a housing shortage.”

‘There are a ton of things happening’

Powell explained the current problems facing homebuyers and sellers to the committee: “You have a shortage of homes available for sale because many people are living in homes with a very low mortgage rate and can’t afford to refinance, so they’re not moving, which means the supply of regular existing homes that are for sale is historically low and a very low transaction rate,” Powell said. “That actually pushes up the prices of other existing homes, and also of new homes, because there’s just not enough supply.”

But it’s a bigger issue than buyers and sellers being locked in, he said. “There are a ton of things happening … because of higher rates, and those in the short-term are weighing on the housing market … it’s more difficult [for builders] to get people [labor] and materials,” Powell said. “But as [mortgage] rates come down, and that all goes through the economy, we’re still going to be back to a place where we don’t have enough housing.”

The pandemic only made things worse. High inflation has made materials and labor costs far pricier, and ballooning mortgage rates have pumped the brakes on an already-slow sector. National Association of Realtors data showed that there were only 3.2 months of available housing supply as of the end of last year, about half as much as there should be in a balanced market.

Markets expect the Fed to announce rate cuts this year—but while that will offer some short-term relief, it won’t solve the housing market’s deep–set supply problems.

Powell noted that restrictive zoning laws play an important role in limiting new construction. He also pointed out that rising mortgage rates have discouraged longtime homeowners who locked in lower rates from moving, which has limited the number of existing homes on the market and left new homebuyers struggling to find affordable options. 

Powell’s threading a tricky needle—the housing market is a big driver of the domestic economy, and overstressing it by keeping interest rates high for too long could threaten the rest of the economy. On the other hand, cutting rates too soon—or too quickly—in line with the industry’s demands could undermine the Fed’s yearslong attempts to stick a soft landing and keep inflation under control. 

“Housing activity accounts for nearly 16% of GDP according to NAHB estimates,” wrote a group of housing industry trade organizations in a letter to Powell last fall. “We urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid.”

Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up for free.



Source link

Subscribe to our magazine

━ more like this

AI hallucinations will be solvable within a year, ex-Google AI researcher says—but that may not be a good thing

If you’ve ever asked ChatGPT, Gemini and other generative AI chatbots a question, you’ll have found that the answers they throw out can...

Anker’s latest Soundcore Sleep earbuds actually improve slumber for less than $90

“Sleep when you’re dead” was the rallying cry of my youth. But now, in the soft haze of dull middle age, I feel...

Jamie Dimon’s JPMorgan and other North American banks are so far ahead in the AI race that one indexing boss says it’s now a...

While the likes of Google, Amazon and OpenAI battle it out in Big Tech for the top spot, JPMorgan is quietly winning Wall...

Humor in the Workplace: How to Be Funny at Work Without Crossing the Line

If laughter truly is the best medicine, then shouldn’t we all be laughing more at work, where we spend a third of our...

Stellantis CEO Carlos Tavares’ almost 60% jump in pay to $39m slammed by investors 2 years after previous compensation plan rejected

Stellantis NV Chief Executive Officer Carlos Tavares’ jump in 2023 remuneration is getting pushback as the Jeep maker pursues deep job cuts and...