While not explicitly defined, the “housing challenge” invokes an idea of “inequality,” and the Fed aims to fight it. Like all problems, we must find the root cause should we wish to find resolution. If housing unaffordability is an issue the Fed chooses to combat, perhaps they should look into their own monetary policies first. Should their interventions be the cause of the problem, refraining from intervention becomes the viable solution. Nevertheless, when the Fed champions a cause, even beyond the scope of their mandate, there is little anyone can do to stop it.
At the National Housing Conference on Tuesday, Governor Lael Brainard harkened back to days of the last financial crisis:
During the mortgage foreclosure crisis, many families around the country suffered the devastating loss of their home through no fault of their own, and homeownership rates have not recovered to pre-crisis levels for the affected groups.
She likens the current crisis to the previous, where, through no fault of the public or the Fed, external events caused financial hardship, targeting minorities and those in the lowest income bracket the most. Due to COVID, we are told, rents and home prices have continued to rise while the supply of “affordable housing” has decreased. Brainard mentions several interventions such as unemployment benefits and various subsidies in an attempt to fight unaffordability. Of course, it’s easy for a Governor to place the blame of a housing crisis on everything except the Fed and propose more intervention. But when interest rate manipulation and inflationist policies are considered, it becomes a tough sell.
Beginning with the Effective Federal Funds Rate, since 2008 rates have stayed near zero. In this time, these abnormally low rates contributed to the perpetual rise in asset prices. For anyone in a low to middle income, the last thing they’d want is for housing prices to continually increase as it makes life that much more expensive. Rising house prices are even addressed in her speech:
Many households have been unable to purchase a home since the last financial crisis due to a confluence of factors, including higher home prices and stricter lending standards. For those who have purchased a home, higher home prices have translated into higher debt levels relative to household income.
Few seem to ask why housing prices are inexplicably increasing and what effect artificially low interest rates have on fueling this housing boom (bubble). As for lending standards, as higher home prices require a greater debt burden, it’s not surprising lending has become tighter than the decade prior.
What of increases to the money supply and how does this affect housing? The Fed’s balance sheet currently sits north of $7 Trillion, with no promise to decrease it any time soon. This was reiterated by Vice Chair Clarida a day before Brainard’s speech, who promised to “maintain an accommodative stance of monetary policy until these outcomes” are achieved; the outcomes being maximum employment and:
until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.
In other words, expect continual asset purchases for a very long time. Yet no one at the Fed seems to consider the disconnect in perpetually claiming low consumer prices despite balance sheet expansion, while household debt levels and those dependent on financial aid appear to be increasing.
The failure to understand money supply vis-a-vis the unaffordability of life is displayed by Brainard who notes that “22 percent of renters pay more than half of their income toward rent.” This leaves little room for families to save. It’s debatable whether rent should be half of the average person’s income and it’s the price of consumer goods that are too high, or whether goods are priced “just right” but rents are too high.
Either way, any mention of inequality requires citing the $7 Trillion of money created since the last crisis. Of this amount, we know the overwhelming majority did not go to the disenfranchised. Not to say this money should have been better allocated, but to say this money should have never been created at all. If inequality is a problem in America, then look to see who received the $7 Trillion first and how their lives were bettered at the expense of the masses. Only then can we have a serious discussion about inequality in this country.
