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The writer is the former chairman of the FDIC and author of the upcoming book “How Not to Lose a Million Dollars”
Shaken by recent election losses and growing voter dissatisfaction with the high cost of living, the Trump administration has renewed its attack on the Federal Reserve for keeping mortgage rates “too high.”
The government is right to blame the Fed for high housing costs, but this is not because it has kept mortgage rates too high. That’s because they have stayed too low and too long in recent years. The affordability of housing is still determined by supply shortages. Lower rates will increase demand, making housing inflation worse.
The great financial crisis led to a collapse in house prices and housing construction. In a desperate attempt to revive the economy and real estate market, the Fed resorted to the controversial practice of quantitative easing to lower longer-term interest rates on mortgages and U.S. Treasury bonds.
It bought up large quantities of mortgage-backed securities, driving up their prices and lowering yields. The Fed gradually collected $1.7 trillion in MBS – which represents about 30 percent of the total market. Mortgages fell to the 4 percent range. Before the crisis, they hovered around 6 to 7 percent (about where they are now).
The Fed’s efforts initially made sense. However, it caused QE to continue for far too long. In the following years, demand increased, but supply did not keep pace, putting upward pressure on house prices. Then the pandemic hit. In March 2020, the Fed resumed massive purchases of mortgage-backed securities, peaking at $2.7 trillion in 2021. Mortgage interest rates fell to a low of 2.65 percent. Combined with the growing popularity of remote working, this led to a strong increase in demand for housing, in a market that is still limited in supply. The result was that average annual home prices rose by double digits. House prices have increased by 47 percent between 2020 and 2024.
While ultra-low mortgage rates depressed new housing demand, it had an even greater impact on refinancing activity, with homeowners scrambling to secure lower rates. About a third of the outstanding mortgage debt has been refinanced between 2020 and 2021.
But this exacerbated supply constraints. Now that mortgage rates have normalized, housing inflation has declined, but is still too high at around 4 percent. A major problem is the resale market, which suffers from a chronic shortage of supply. Homeowners do not want to give up their cheap mortgage by moving. So the Fed’s actions had a double whammy: they caused massive housing inflation while worsening supply imbalances.
This whole sad story shows the folly of using demand-side incentives in supply-constrained markets. However, the government continues to prioritize demand-side measures to address housing affordability. It has proposed a 50-year mortgage that, by extending the loan term, would lower monthly payments. This could draw more buyers into the housing market, but only with mortgages that double their interest costs over the standard 30-year mortgage and take decades to build significant equity.
The proposal confuses housing affordability with mortgage payment affordability. Working families need homes at prices they can manage and mortgages that allow them to build wealth.
The blue state’s Democratic leadership — which has contributed to shortages with restrictive zoning and permitting requirements — has finally understood that supply is the key issue. California, Colorado, Massachusetts, Maryland and Washington are all states that have embraced more permissive zoning and permitting requirements to expand the supply of low-cost, affordable housing.
Bipartisan legislation co-sponsored by Senators Tim Scott and Elizabeth Warren to cut red tape and provide financial incentives for new housing has past the Senate, but it will take a push from the government to pass the House. This would be much more productive than bashing the Fed.
Fed Chairman Jay Powell commendably committed to continued expansion of the central bank’s MBS portfolio and promised that the Fed would not intervene again with purchases in that market.
Will the next Fed chairman appointed by Trump succumb to the pressure and resume it? It would be ironic if, as Democrats finally embrace deregulation to address housing supply, Republicans embrace the failed demand-side approaches that created the very inflation that helped elect President Donald Trump.
The Republican Party should consider housing affordability as a problem, but to do that it must focus on building more homes, not the illusory quick fix of monetary policy.
