Jerome Powell says the ‘real issue’ behind the US housing crisis is ‘not something the Fed can really fix’

Housing affordability has become a significant challenge in America, with high home prices and elevated interest rates making mortgage payments increasingly burdensome for prospective buyers.

On Sept. 18, the Federal Reserve implemented its first rate cut since March 2020, lowering the target for the federal funds rate by 50 basis points to a range of 4.75% to 5.00%.

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While rate cuts by the Fed typically lower borrowing costs, experts say increased affordability in mortgages could lead to a higher demand for homes that would drive up home prices.

Fed chairman Jerome Powell addressed these concerns in a press conference following the September rate cut announcement. He acknowledged that the housing market is “in part frozen,” with many homeowners hesitant to sell because they are locked in at lower mortgage rates. As rates decrease, more people may be willing to sell, potentially increasing market activity. However, he noted that each sale could also bring a new buyer into the market, so the impact on overall demand remains uncertain.

“So, it’s not obvious how much additional demand that would make,” he remarked, highlighting the complexity of predicting the housing market’s response to rate changes.

‘The real issue’

Powell highlighted what he believes to be the true driver behind the housing crisis.

“The real issue with housing is that we have had and are on track to continue to have, not enough housing,” he said.

In other words, it’s a supply problem.

He explained that it has become increasingly difficult to find and zone land in desirable locations, and “all aspects of housing” face challenges.

“Where are we going to get the supply?” he asked, emphasizing the severity of the problem.

An analysis by Zillow published in June estimated the housing shortage to be 4.5 million homes as of 2022.

Powell’s assessment of the situation is stark: “This is not something that the Fed can really fix.”

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However, he noted that the Fed can still play a role in easing the situation. By normalizing interest rates, he says the central bank can help normalize the housing market.

“That’s the best thing we can do for householders, and then the supply question will have to be dealt with by the market and also by government,” he concluded.

Navigating the crisis

With high home prices and the Fed’s recent pivot, prospective buyers face a difficult decision.

If the Fed continues to lower rates, mortgage rates are expected to follow suit, which can reduce monthly payments and make homeownership more accessible. Fannie Mae forecast in September the average rate on a 30-year mortgage could fall to 6.2% by the end of 2024 and further decline to 5.7% by the end of 2025.

However, as rates drop, demand for housing may increase, potentially leading to higher home prices. This could offset the benefit of lower mortgage rates, especially in high-demand areas with limited inventory.

For those considering entering the market, it’s essential to weigh both current affordability and the possibility of future price fluctuations. Buyers with financial flexibility might benefit from acting now to secure a home, with the option to refinance later if rates drop. For those prioritizing lower monthly payments, monitoring the market and being prepared to move quickly as rates decline could be a prudent approach. Additionally, it may be wise to consider exploring emerging markets or up-and-coming neighborhoods where prices are still more affordable.

Investing in real estate

Despite high mortgage rates in recent years, real estate remains a red-hot asset class. Over the last five years, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index has surged more than 50%.

A well-chosen property can provide more than just price appreciation. Investors also get to earn a steady stream of rental income. Since rent typically increases with inflation, this creates an effective hedge against the diminishing purchasing power, thereby preserving and potentially enhancing an investor’s real income over time.

And for those who aren’t ready to buy a property outright, there are numerous ways to invest in real estate without the responsibilities of being a landlord. Real estate investment trusts and crowdfunding platforms offer access to institutional-quality property portfolios, allowing everyday investors to earn rental income and benefit from property appreciation without direct ownership.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.