After the dot-com bubble of the late 1990s, the Federal Reserve responded with monetary inflation to drive down interest rates, which fueled the housing bubble that precipitated the 2008 financial crisis.
The Fed then responded to that crisis by quadrupling down on the monetary inflation and essentially trying to reinflate the housing bubble, including by buying up mortgage-backed securities (MBSs).
When the government deliberately shut down the economy during the COVID-19 lockdown madness, the Fed tried to paper over the economic devastation with—what else?—more money printing.
I tried to warn people at the time that the “stimulus” would just cause harmful price inflation down the road, which is just what happend, notwithstanding the institutional nonsense about it being just “transitory”.
The Fed did try for a while to decrease its balance sheet, letting assets roll off as they come to maturity, but its its “quantitative tightening” ended several months ago, and the Fed has shifted to maintaining if not increasing its balance sheet.
A key factor in that policy is shifting the balance sheet proportionally to buying up more government debt, thus keeping interest payments on the debt lower, while allowing MBSs to roll off.
This has kept upward pressure on mortgage rates even while the Fed has lowered its Fed Funds rate, which is the overnight bank-to-bank lending rate (banks borrowing from each other to maintain their reserve requirements).
The reason there is a housing affordability crisis has everything to do with the massive government intervention into the housing market that has been going on for so long.
Government created the problem, and then to try to fix it ends up doing even more of the same as what caused the problem only on an even greater scale.
The aim is always popular short-term “fixes” that only cause greater pain down the road.
Someone whose economic and financial commentaries on YouTube I discovered around the time the Fed ended its quantitative tightening is Joe Brown of Heresy Financial.
In the following video, he explains what the key problems are and why Donald Trump’s proposals won’t fix the housing affordability problem. He’s really good at explaining complex economic issues for a general audience, and I highly recommend watching this to understand what’s happening in the housing market.
He explains:
- Why the housing affordability crisis cannot be solved without a market correction in home prices that will hurt the home equity of existing homeowners
- Why introducing a 50 year mortgage option won’t address the problem
- Why institutional investors are not the problem
- Why the housing market is frozen with potential sellers not wanting to put their home on the market
- How the Fed has ended quantitative tightening and is shifting into quantitative easing (i.e., “money printing”) by letting mortgage-backed securities roll off its balance sheet while buying more Treasury securities (i.e., government debt)
- Why mortgage rates have barely budged despite the Fed lowering the Fed Funds rate
- How Trump plans to have the government buy $200 billion in mortgage-backed securities to drive rates down and “make the cost of owning a home more affordable”
- Why now “This is a command and control economy, there are no free markets left.”
- Why all the government intervention is the cause of the problem and more intervention will only make things worse in the long run
My own family for years has been struggling in the face of the housing affordability crisis, and we only just last summer ended up buying a home due to extenuating circumstances forcing us onto the very difficult and unfavorable market.
We basically got really lucky finding a place. Stars just aligned, and the universe basically gave us no choice but to move out of the rental home we were at and to accept the risk of taking on a mortgage.
So, while I don’t really like the idea of my own property’s value dropping and losing home equity I’ve only just started building, the ultimate solution is for a market correction to occur.
The problem is that the politicians refuse to allow that to happen. They do not understand how an economy functions and the need for market prices, and they will go on just compounding the problems.
How about you? What situation are you in, and what problems are you facing? What hope do you see, and how can we navigate this mess to keep a roof over our heads and provide for our families?
Share your thoughts in the comments below.
Government permitting, approvals, bureaucracy, etcetera, are the prime culprits of housing UNaffordability. Just the permits, zone restrictions, and filings required at the local level create such a huge financial investment to build a single-family home, that it is not economically feasible to go the process to create “starter homes” for people to work their way up the housing ladder. Look at what’s happening in California ~ the folks trying to rebuild (not even “mansions,” just residences) can’t get through the permitting and government stipulations to replace their homes.
We recently sold my family homestead. I saw the zoning and permits the new buyer was having to fund for the city to “allow him” to basically replace a maintenance building and replace old mobile homes with newer housing … it was incredible!
Add to that the various federal agencies that get involved anytime undeveloped land is being considered for residential use … again, the costs, restrictions, and prohibitions make it an economical blackhole for a developer. The only cost-effective choice is to build more large, mortgage-intense, custom homes … and further exacerbating the average cost for homes out of the price range of average working families.
I grew up in a small coastal town that has now become “gentrified” with corporate “PR homes” subsidized by tax-deductible loopholes that encourages building mega-homes worth more than three times the typical residence before the surge. It has now created a community with few available homes in the price range of blue-collar, service industry employees. They now live nearly an hour away and commute daily to fill the local jobs market. What would have been considered “normal residences” (2- or 3-br, 1200-sq-ft homes) have doubled or tripled in price relative to the pay rates in the area for those workers.
Government “intervention” is the CAUSE of the problem; let’s return to a free-market capitalist construction process.
Thanks for those insights, Chris. Joe in the video does mention the bureaucratic red tape as a major problem, but he doesn’t go too far into it.
“The only cost-effective choice is to build more large, mortgage-intense, custom homes…”
Makes perfect sense. Human action. People respond to incentives. And developers gotta do what they gotta do.
And I’m glad you and I agree on the solution!