Jerome Powell’s term as Fed Chairman is over and now begins the inevitable process of assessing his time in power with the benefit of hindsight. I believe history will eventually show his tenure to have been marked by enormous mistakes that continue to distort the U.S. economy; particularly in housing where we may well remember Powell as the Fed Chairman who froze the American market.
Over the last year, U.S. housing markets have seen two positive developments: inventories of existing homes for sale have returned to pre-pandemic levels and mortgage rates have drifted down from the 7% range to the low 6’s. Combined with a homeowner vacancy rate of just 1.1% lower than at any point from 1980 to 2020 and home prices growing more slowly than household incomes, we should be seeing signs of recovery in home sales.
Instead, existing home sales remain below even the worst years of the Great Recession housing collapse. Inventories of new homes for sale are stuck at roughly nine months of supply, near record highs. Housing starts and homeownership rates are drifting downward, even as frustration among would-be buyers grows.
Politicians call this an affordability crisis, but that misses the point. Existing homeowners are not struggling with affordability. Housing equity is at record highs, roughly $400,000 per homeowner and owner costs as a share of income remain historically modest at 18.9% in 2024, below levels seen from 2005 to 2015. Renters are not dramatically worse off either, with median rent-to-income ratios at 32%, well within the range of the last 25 years.
The real problem is market paralysis. Most homeowners are sitting on mortgages far below current borrowing rates. According to the Federal Housing Finance Agency, four out of five mortgage holders have rates below 6% and two-thirds are below 5%. Moving to a similarly priced home would mean sharply higher monthly payments, giving owners little reason to sell unless absolutely necessary.
The result is a collapse in what economists call filtering. Entry-level homes are no longer becoming available because existing owners are not moving up.
Builders, facing high fixed construction costs, avoid lower-margin starter homes altogether. The market is trapped in a vicious cycle: too little movement, too little supply where it is needed and prices that stay elevated because turnover remains frozen.
This mess is the direct consequence of the Fed’s extreme pandemic-era policies. Roughly $5 trillion in quantitative easing, far beyond anything the economy needed to deal with the short shock created by the pandemic, pushed mortgage rates into the mid-2’s even as home prices surged. Then the inevitable inflation caused by expanding the money supply by 40% in 18 months forced the Fed to reverse course at breakneck speed, hiking rates aggressively. Mortgage rates shot into the 7’s and the housing market seized up.
Policymakers need to focus on breaking this logjam. One obvious solution would be to make mortgages assumable again, as many VA and Federal Housing Administration loans once were, allowing owners to move without losing low-rate financing. Another would be to reduce the fixed costs of building entry-level housing such as townhomes.
Instead, politicians continue chasing headline-friendly but ineffective policies such as the 21st Century ROAD to Housing Act (H.R. 6644), which seeks to ban large investors from owning single-family rental homes, removing yet another potential source of housing supply.
These policy choices shouldn’t be that surprising. After all, Powell leaves his post still insisting that the Fed actions of 2020 and 2021 had nothing to do with the subsequent increase in prices. Inflation, failed banks, asset bubbles and a frozen housing market that could be with us for a long time to come. This is Jerome Powell’s real legacy and one we’ll continue to grapple with in the coming years.
By Christopher Thornberg, PhD. He is Founding Partner of Beacon Economics LLC. He can be reached at chris@beaconecon.com.
This column is featured in our June issue of Builder and Developer. Read the print version.
