The cost of housing was a recurring theme during the July 9th Senate Banking Committee hearing, where Fed Chair Jerome Powell testified before the Senate committee.
Senators from both parties highlighted the struggles of Americans finding affordable places to live and pressed Powell on the impact of the Fed’s monetary policy on housing affordability. Below, we outline quotes from the hearing that capture Powell’s key points on the housing market and it’s broader economic implications.
Be sure to tune in to today’s Hot Sheet, where Byron Lazine broke down all of Powell’s remarks on housing.
Opening Statements: Housing and Rents Continue to Go Up
During his opening statements, Senator Sherrod Brown, Chairman of the Senate committee on Banking, Housing, and Urban Affairs, set the stage for further discussions, commenting on housing affordability and the housing shortage:
“Keeping rates too high for too long threatens workers’ paychecks while keeping other costs high – particularly housing.
“Housing prices and rents continue to go up.
“It is no surprise that since the Fed began raising rates, the amount of income families need to qualify for a mortgage has nearly doubled.
“Home ownership has long been a bedrock of our middle class, but today, fewer and fewer middle-class families can afford to buy a home
“And higher interest rates are making our country’s housing supply shortage worse, not better. We need more housing construction, of all types. Higher rates lead to the opposite, and particularly make it harder for multifamily construction to work financially.
“Higher interest rates make borrowing more expensive for working families – whether it’s for a mortgage or a car or anything else. Most people do not have the luxury of paying for everything in cash.”
How Does Housing Impact the Overall Economic Picture?
The first discussion with Powell on housing came at 15:42 when Senator Jon Tester from Montana remarked on how housing shortages hinder economic growth by limiting where businesses can locate and recruit workers. Chair Powell acknowledged the housing challenges but emphasized the Fed’s primary focus on controlling inflation to achieve price stability.
Tester: “Look, regardless of where I go in the state, Montana housing is a big issue, whether it’s Billings or Butte or Bozeman or Busby or Big Sandy, it doesn’t matter. Larger towns to medium sized towns to small towns, housing is a huge issue and I think it’s a huge issue all over the country. And correct me if I’m not correct in that, and I was wondering how the housing challenges fit into the overall economic picture that you’re seeing.”
Powell: “So we do pay a lot of attention, and I would agree with you; we have significant housing issues in the country, and we had them before the pandemic. Certainly, the pandemic has created new distortions and monetary policy works through interest-sensitive spending. There is no more interest-sensitive spending than buying a house and having a mortgage. So for sure, our tighter policy is having an effect on economic activity in the housing sector. But I would also say the best thing we can do for housing is to succeed in getting inflation down to 2% on a sustainable basis so that rates can come down so that the housing market can get back to what was the pre-pandemic normal, which is to say still a housing shortage but not dealing with the kinds of specific things we’re dealing with now.”
Tester: “Let me drill down a little bit. I’m speaking not necessarily from a housing cost interest…I’m speaking more from a standpoint of economic growth and that there are plenty of small businesses, schools, hospitals, main street businesses that can’t hire people, they can’t expand because there simply is no place for ’em to live. How does that fit into your economic outlook metrics?”
Powell: “So our mandate is for stable prices and maximum employment. And again, I think for housing supply, the best thing we can do is get inflation under control so that rates can come back down so that we can have a more normalized set of rates and a more normalized housing system. But I think policies to increase housing supply are really not so much in the hands of the Fed, they’re in the hands of legislatures, state and federal.”
Tester: “Do you believe that if we were to put forth some housing incentives, whatever they may be, that could have a, if it resulted, if those incentives resulted in more affordable workforce housing on the market, that would’ve positive impacts on the economy?”
Powell: “These are questions for you, but I would say this, that I’m aware that housing is in short supply and that for many, it’s a critical need for the workforce, and so more of it is better, but as to where the fiscal policy, how you should prioritize that, that’s not up to us.”
Higher Rates Make Housing More Unaffordable
The next discussion of housing came from a quick set of questions from Senator Sherrod Brown from Ohio, starting at 28:10. Brown noted that despite higher interest rates, median home prices have continued to rise, making mortgages less affordable.
Brown: “Housing: higher interest rates are making housing more unaffordable. Higher rates are supposed to lower cost, yet housing prices continue to soar by keeping rates high. The Fed ignores the economic reality of the millions of Americans struggling to make ends meet and get ahead. Let me ask you three quick yes or no questions, if you would answer that way. Since late 2022 when the Fed began raising rates, has the volume of housing sales decreased?”
Powell: “I believe it has, yes.”
Brown: “Since late 2022, has the median home price increased?”
Powell: “I believe it has.”
Brown: “Since late 2022 have monthly mortgage payments become more affordable or less affordable for home buyers?”
Powell: “Less affordable.”
Brown: “Okay, thank you. In short, despite housing sales declining, the median price for a…. single-family home is increased by nearly $20,000. People are spending a greater share of their income and mortgage payments. So in some higher rates—it’s clear higher from your answers and data—it’s clear higher rates are not bringing down housing costs. The cost of home ownership is only going up.”
Younger Generations Face Tough Choices
Senator Laphonza Butler from California expressed concern about the impact of high housing costs on younger generations, starting at 54:00. Chair Powell maintained that controlling inflation is the best long-term solution, but acknowledged the short-term difficulties for those trying to buy a home.
Butler: “Given the severe shortage of affordable and available homes to buy, coupled with high interest rates, young Americans are continually unable to afford homes and are pushed into a rental market, driving rental costs up. So there is sort of trickle-down impact here. A recent Washington Post analysis showed that Gen Z is spending 31% more on housing than their millennial counterparts where were 10 years ago after adjusting for inflation. How do you view—that was a long lead in to just ask the question, how do you envision or view the interest rates of today and the monetary policy balancing that the Fed is doing on contributing to the future generation predicament if we are to extrapolate the conditions of today.”
Powell: “So our job, of course, is the whole economy and inflation for the whole economy, and the absolute best thing we can do for younger people is to restore price stability. So that, as we benefited from, I graduated from college in 1975, near the end of the big inflation period, so during most of my adult life, inflation has just been not a factor. And that means stable interest rates, relatively low interest rates. We want to get back to that, and that is what the Fed’s job is, is that we’re not supposed to look at the housing market as separate of the overall economy. In the meantime though, there’s no question that higher interest rates are making it harder to buy homes in the short term. But in the longer term, this is the best thing, particularly for younger people who are not yet in the housing market.”
Immigration and Housing Costs
At 1:09:18 Senator J.D. Vance from Ohio raised the question of immigration’s role in housing affordability. While not commenting on immigration policy itself, Chair Powell suggested that immigration’s impact on inflation, including housing costs, is likely neutral in the long run, and might have even eased pressure on the labor market in the short run.
Vance: “Given the current low inventory of affordable housing, the inflow of new immigrants in some geographic areas could result in upward pressure on rents as additional housing supply may take time to materialize. With labor markets remaining tight ,wage growth has been elevated at around or above 4%, still higher than the pace consistent with our 2% inflation goal given trend productivity growth. The Bank of England, I believe produced a recent report on this issue in the United Kingdom, obviously a different economy in a different country, but what do you see as the relationship in particular given that housing is such a big driver of the inflation that we’ve seen over the last few years as Senator Haggerty said, the highest in 40 years. What role do you see illegal immigration playing in driving up housing costs, which of course is a main driver of inflation for American citizens?”
Powell: “Let me quickly start by echoing your first comment, which is we don’t comment on immigration policy, but we do comment on inflation. So I would say this, many people came into the country over the last couple of years, many of them through asylum requests and went to work, labor supply increased a great deal. There’s no clear answer, but my sense is that in the long run, immigration is kind of neutral on inflation. In the short run, it may actually have helped because the labor market got looser because there were more people. But to, you’re talking about housing specifically, there will be, I’m sure there are places in the country where new people coming into the country, I’m sure you can find places and they exist where that will have contributed to an already tight housing market. But overall in terms of aggregate inflation, I wouldn’t say it’s a driver one way or the other.”
Building More Housing Key to Long-Term Affordability
The lengthiest conversation surrounding housing was with Senator Raphael Warnock of Georgia, starting at 1:38:22. Warnock emphasized the need to increase housing supply as a key factor in affordability. Chair Powell agreed and pointed to inflation control as a way to create a more favorable environment for new housing construction, particularly affordable housing.
Warnock: “The latest monetary policy report shows inflation and housing costs is gradually easing. That’s good news, but many Georgians still feel the sting of unaffordable homes and mortgages. And one reason for this, you and I have discussed this, is that we aren’t building enough houses. 2022 study published in the Journal of Economic Geography found that for every 10% increase in the housing stock, rents decreased by 1%. We’ve discussed this issue, particularly the effects of housing supply on housing costs, and we agreed that while the Federal Reserve does not control housing supply, it can help create the environment that encourages the construction of new housing, particularly affordable housing. Chair Powell, how has the Fed been working to foster an environment that encourages home construction, and what in your view are the challenges that remain?”
Powell: “So in the long run, the absolute best thing we can do for the housing market. And for the economy is to sustainably bring inflation back down so that people aren’t talking about it anymore and it’s just assumed by everybody in their daily lives that inflation will be around 2%, so we don’t need to talk about it, which is where we were for a long time. We want to get back to that. Interest rates can come down then and the housing market can return to the state it was in before the pandemic, which was to say really tight. We don’t have enough housing, and that’s not really a monetary policy issue. In the short term though, I would say tight monetary policy weighs on the housing market. The policy works through intra-sensitive spending, and housing is definitely at the top of the list of intra-sensitive spending. So we understand that we’re suppressing, not suppressing, but our higher interest rates have led to lower housing starts and lower activity in the housing market. But we’re doing that to get back to 2% inflation for the whole economy so that the housing market can be on a better foundation.”
Warnock: “Well, and related to that, when you have these high interest rates, of course you see across the country, but particularly in a state like Georgia, these institutional investors who are coming into the space and they’re buying houses in all cash, boxing out, first time, first generation home buyers and of course the conditions for them doing that improve to their favor with higher interest rates. Would you agree with that assessment?”
Powell: “I know some of that’s happening. I don’t know that higher interest rates make it… I’m just saying higher interest rates doesn’t make their investment any cheaper. Notwithstanding, I understand it’s a sensitive issue and in most markets it’s still a pretty small portion of the outstanding housing stock and it’s not an issue for us. They’re a legal buyer of housing. Our job is really the whole economy. I mean it’s more of a question for legislatures.”
Warnock: “So how can the Fed better deploy its monetary tools to ensure that we are meeting key inflation objectives like housing affordability?”
Powell: “I think the best thing we can do is kind of what we think we’ve been doing, which is to move carefully as we think about loosening policy and make sure that we do that when we’ve got greater confidence that inflation is moving sustainably down toward 2%, we’re also keeping a close eye on the labor market and if we see unexpected weakening there, then we could respond to that too. But that’s really the best thing we can do for the whole economy and very specifically for the housing market too.”
Warnock: “You point out that you’re limited in terms of your influence there, and there is a role for Congress to be sure, which is one of the reasons I wanted to be on this committee to introduce a down payment toward equity act with my colleague, Senator Butler. This bill would help first-generation home buyers compete with Wall Street institutional investors by helping with down payment costs, closing costs, and costs to reduce interest rates. I look forward to continuing productive conversations with you and looking at how we can make housing more affordable for all Americans. I’m running out of time here, but one of the other concerns that I maintain is with respect to reducing the racial wealth gap is this issue around home appraisals, and the Fed is part of the interagency task force on property appraisal and valuation equity. What expertise and perspective has the Fed brought to this task force and how are you responding to this issue of home appraisals?”
Powell: “So, as you know, we’ve been an active participant in that task force, and we bring all of the expertise we have in the housing market as well as regulatory, supervisory and economic expertise generally as we look at that. And I’ll also say that our strongly held view is that discrimination has no place in the banking system and that includes appraisals and other regulations.”
The Senate Banking Committee hearing highlighted the multifaceted challenge of housing affordability in the United States. While the Federal Reserve focuses on controlling inflation, lawmakers seek solutions to address the short-term impacts on housing markets and the long-term need for increased housing supply.
Today, Powell will continue his testimony on Capitol Hill. We’ll be sure to update you on the here on any additional remarks on housing.
