Web Stories Sunday, April 21

America has a housing affordability crisis and Elizabeth Warren blames Jerome Powell and his colleagues at the Federal Reserve.

In a Sunday letter to Powell, shared first with CNN, Warren expressed alarm at how “astronomical” mortgage rates have made a bad situation worse and urged Fed officials to start cutting borrowing costs.

“We urge you to consider the effects of your interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach for too many,” Warren and fellow Democratic Sens. John Hickenlooper, Jacky Rosen and Sheldon Whitehouse wrote.

To fight inflation, the Fed spiked interest rates at the fastest pace since the early 1980s. That aggressive strategy has successfully cooled inflation towards healthy levels – so far without fueling the recession many predicted.

However, the Fed’s war on inflation set off shockwaves in the housing market. Mortgage rates spiked to nearly 8% last fall. The one-two punch of elevated borrowing costs and record-high home prices has made the housing market historically unaffordable.

“High interest rates have aggravated the country’s crisis of housing access and affordability,” the Senate Democrats wrote.

A spokesperson for the Fed told CNN it received the letter and plans to respond.

The Fed begins a two-day meeting, its first of 2024, on Tuesday and officials are expected to debate when to start cutting interest rates.

Warren and her colleagues said the Fed’s decision to pause rate hikes in September and in December was a “welcome first step,” paving the way for a drop in mortgage rates that has “provided some welcome relief.”

The 30-year fixed-rate mortgage averaged 6.69% as of January 25, up from 6.6% the week before, according to Freddie Mac.

“Interest rates are still too high for many American families, who already cannot afford to pay rent or buy their first homes,” the lawmakers wrote.

Warren and her colleagues argue the Fed’s tough medicine has worsened America’s supply of homes in two key ways.

First, high borrowing costs have discouraged developers from building homes, exacerbating the supply shortage.

Secondly, there is a “lock-in effect” where existing homeowners with low mortgage rates are reluctant to list their homes because they would need to get a new mortgage at far higher rates.

Hurt by historically low inventory, just 4.09 million homes were sold last year, the fewest since 1995.

The housing industry has made similar arguments to the Fed.

In October, the National Association of Home Builders, Mortgage Bankers Association and the National Association of Realtors wrote a letter to Powell expressing “profound concern” that uncertainty over Fed policy has contributed to rate hikes and volatility.

“This has exacerbated housing affordability,” the housing industry groups wrote in the letter.

In their Sunday letter, Warren and her colleagues warned that Fed policy could be widening the gap between the haves and the have-nots.

“The ever-growing affordability crisis places a disparate burden on the shoulders of Black and Hispanic households,” the lawmakers said, noting the homeownership rate of Black and Hispanics is well below that of White households.

They also cautioned that the negative consequences from high borrowing costs have spilled over into the rental market by making construction more expensive and increasing the number of renters.

Some Wall Street banks and leading economists say the Fed could start cutting interest rates in the coming months, a prospect that has sent the stock market surging in recent months.

In a recent interview with CNN, Richmond Fed President Tom Barkin didn’t rule out a March rate cut, but said he’d like to see inflation “convincingly headed back to our target.”

Investors have priced in a roughly 50% chance of a rate cut in March, according to the CME FedWatch Tool.

“The Fed has already signaled its willingness to cut rates, and the market has responded accordingly,” Warren and her colleagues wrote. “Working families, already struggling with the high cost of housing, need relief now.”

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