The late summer of 2021 saw mortgage rates fall to near-all time lows while inflation grew. A borrower with excellent credit could borrow hundreds of thousand of dollars over 30 years for under 3%. 2.9 percentDespite the fact that inflation has already risen to above the average, this is still a good thing. 5 percent.
This same 30-year mortgage, fourteen months later, is selling for just shyof 6.5 percentAnalysts have predicted that it could rise to 7 percent within weeks. The average mortgage in the United States is just over $400,000. The average family who buys a house will need to pay $16,000 more interest in 2023 if the mortgage rates rise by 4 percent over the course of 15 months than they would have if they had secured a mortgage one-year earlier.
Because the Federal Reserve moves, the rest follows, global interest rates are also on the rise. Many international observers are concerned. In fact, a report published earlier this week by the United Nations Conference on Trade and Development (UNCTAD)It was warned that a rapid tightening of monetary conditions could have a greater impact on the global economy than the 2008 crash and the COVID pandemic. It was no surprise that this downturn would be felt most heavily by low-income families. UNCTAD asked the Fed not to raise interest rates.
Inflation creates a climate uncertain for businesses, and when combined with the low unemployment levels currently seen in the U.S., it leads to wage increases that eventually have the potential to recalibrate the economy in organized workers’ favor. Since the Fed is determined to re-establish certainty for businesses and to rein in inflation at all costs, it is unlikely to heed UNCTAD’s warnings, and is likely to plow ahead with its regimen of rate increases.
In the U.S. — and, by extension, much of the rest of the world — two things are happening to the housing market in response to these hikes: the number of homes being bought and sold (and consequently the number of mortgages being taken out) is falling, and housing prices are starting to decline as purchasers feel more pinched by the cost of borrowing. Both will be disproportionately affected by lower-income families as well as new homeowners who are trying to climb the housing ladder.
For seven consecutive months now the number of home sales has declined.This means that fewer people can afford homeownership. It also means that it’s becoming harder for those who already own homes to sell in order to move either to a different city or into better or bigger accommodations in the cities they already live in.
Even though average home prices were rising modestly through the summer, in many high cost cities, a decline in prices has already begun. Indeed, some studies show that in more than three-quarters of cities, home prices over the past month have retreatedFrom their COVID-era highs. In Seattle, San Diego, Sacramento, San Jose and Las Vegas, Redfin data suggest double-digit drops in what homes are selling for as the Fed’s interest rate hikes ricochet through the broader economy.
Moody’s Analytics now predicts that over the next two years, housing prices will fall in just over half of the 414 major markets that it surveys. It finds that most of these markets, including those in the Sunbelt or West, are overvalued by more than 25%. This means that homeowners who bought their homes in the last few decades when interest rates were at their lowest levels and home values were skyrocketing are at risk of becoming underwater as their real estate investments fall and mortgage rates rise.
This is even more frustrating because it was an avoidable tragedy. Homeowners don’t make decisions in a vacuum; they buy and sell at least in part because of a financial environment determined by the monetary decisions of the Federal Reserve and the policy decisions of the U.S. government. The housing market was overheated by a conscious effort in making money as cheap as possible for as many years as possible. Now, that housing bubble has been punctured by panicked responses to inflation by central banks applying the lessons from the past inflationary cycles to a new environment that is pandemic- and conflict-affected. The central banks’ interest rate hikes are intended to punish home buyers who failed to correctly predict inflationary pressures in an era of Russian expansionist military activities and COVID. Whether that punishment will even work, by the Fed’s own terms, and reduce inflation is very much an open question.
The Federal Reserve has gone on an interest-rate-raising spree in recent months as it belatedly attempts to put the inflation genie back in the bottle. This is ironic. The talking heads and maestros of finance — the experts whose every word markets hang on — spent months trying to calm rattled markets and investors by promising that inflation was transitory, that the fundamentals of the global economy were fine, and that once COVID-related supply chain glitches got sorted out, the world’s major economies would rapidly revert back to inflation in the desired 2 percent range.
They were obviously horribly wrong. In hindsight, they ought to have gently raised interest rates and tapped the breaks on the housing market before the inflationary spiral took hold, instead of waiting until it was a crisis of such urgency that the massive and rapid interest rate hikes came to be seen as the only tool left in the Fed’s anti-inflation toolkit. However, it is always better to look back than forward. Their analysis of inflation 2021 and 2022 in the moment was as flawed as those made 15 years ago when they ignored the increasingly urgent signs that a collapsed housing market was imminent and threatened to destabilize key pillars of the global financial system.
The housing market was becoming more volatile from 2006 to 2008. Policy makers and those in charge of monetary policy did not address the problem until it was too late. When vast numbers of people started to default on their mortgages, and lenders began to suffer a liquidity crisis, it took trillions of dollars of coordinated international interventions to keep the world’s financial system from entirely seizing up and to stop the major industrial economies from sliding into a depression.
In 2022, experts who should have known better are likely to respond in a similar manner to the crash of the housing market. Tens of millions of Americans have saved their lives by investing in the housing market. This is due to the encouragement of policymakers who kept interest rates artificially low for over a decade.
The political repercussions from the crash of 2008 are still playing out today; it’s hard to imagine Trump’s ascendancy absent the aftereffects of the crash: the collapse in confidence in government agencies and elected officials, the distrust of self-proclaimed experts, the immiseration of millions of families, and the rage triggered by banks being bailed out while homeowners and ordinary workers were largely left to fend for themselves.
Today, the Fed is moving toward an ever-increasing rate. It is essentially declaring that large increases in unemployment are acceptable — possibly even desirable so as to curb worker power — as a way to rein in an economy it let overheat for years. There is a risk of a sudden and calamitous collapse of the housing market in 2008, as well as a contraction in employment and the unleashing of huge political furies.
Sometimes, UNCTAD seems able to conclude, the treatment is more important than the disease. In putting both the stability of the U.S. housing market and the employment of large numbers of Americans at risk with a rigid anti-inflation regimen that doesn’t take into account the very particular reasons for rising prices in 2022, the Fed risks fueling growing immiseration, and, in consequence, increased levels of societal upheaval. For months now, the Federal Reserve has talked up its ability to create a “soft landing” for the overheated economy. Now, in dramatically raising the costs of borrowing over the past few months, it has essentially accepted the necessity of a “hard landing” that triggers misery for millions of existing homeowners and puts the ability to purchase a home further out of reach for growing numbers of would-be first-time home buyers. That’s not sound economic policy making; rather, it’s decision-making via panic.
Yes, the Fed’s interest rate-raising frenzy of 2022 may ultimately curb inflation, but the collateral damage this time around, in terms of housing access and unemployment, could rival that of 2008. It could, if things really head south, be as unpleasant as the early 1980s, when monetary policy makers in Reagan’s U.S. and Thatcher’s U.K. sent interest rates and unemployment skyrocketing, in their efforts both to break the power of organized workers and also to tamp down inflation. That’s hardly the mark of a well-thought-out and humane monetary policy.