Mortgage rates are not the culprit behind the affordability crisis; rather, it's the skyrocketing home prices that have surged by 40-70% in just two years. This crisis has left many struggling to keep up with the rising costs of housing.
But there's a solution to this crisis. The key lies in addressing the root cause: the unprecedented surge in home prices. The Federal Reserve's quantitative easing (QE) policies, which aimed to keep mortgage rates low, inadvertently triggered a massive bout of home price inflation. This resulted in negative 'real' mortgage rates, where the mortgage rate was lower than the inflation rate, effectively providing free money to buyers.
However, this situation was not sustainable. By early 2022, inflation was soaring towards 9%, and the Fed continued to maintain near-zero short-term interest rates and QE, despite the rising inflation. This reckless approach led to an unprecedented surge in home prices, with many markets experiencing increases of 50%, 60%, and even 70% in just two years.
The solution to the affordability crisis lies in reversing this price explosion, not in lowering mortgage rates. Rising wages over the years, coupled with a gradual decrease in home prices, will help restore affordability. For instance, in Austin, Texas, home prices have dropped by 24% since their peak, and in Sarasota County, Florida, prices have decreased by 16%.
However, in other markets like Chicago, the affordability crisis is still worsening, and lower mortgage rates would exacerbate the problem by further driving up prices. The median face of the affordability crisis is evident in the explosive price increases in some markets, while others have seen more moderate increases. The key to resolving this crisis is to allow market prices and wages to find a balance over time, ensuring a modicum of sanity and health in the housing market.
