Rate Hikes Have Done Little to Cool the Housing Market

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The Fed’s Rate Hikes Have Done Little to Cool the Housing Market

Remember that iconic scene of the cheese race in England, where competitors tumble down a steep hill chasing a wheel of cheese? That hill represents the trajectory of the Federal Reserve’s interest rate hikes over the past year intended to fight inflation. Rates have gone sharply up up up!

And to what end? What do we have to show for all of that economic pain caused by rapidly rising rates? Specifically when it comes to the housing market, what impact have these rate hikes actually had?

Let’s examine the data.

As this graph shows, median home sales prices in the US continue their unrelenting upward march even in the face of the Fed’s anti-inflationary rate hikes. After all that economic turmoil, housing costs refuse to meaningfully correct.

And it’s not for lack of trying to rein in demand. Housing inventory hit a recent low of 346,141 units during the pandemic, still well below the pre-recession average of 1.2 million homes on the market. Today, we’re up to 754,846 homes for sale nationally. An improvement, yes, but still far from a healthy functioning housing market.

So what gives? Why hasn’t the Fed’s monetary policy put much of a dent into the housing market’s meteoric rise?

Well, the nobel-prize winning economist Milton Friedman observed that the internet pushes markets closer to “perfect information”, allowing buyers and sellers to efficiently find each other and transact. But that economic principle fails to apply to the housing sector. Inventory remains constrained while prices climb ever higher.

This points to a deeper flaw in how we view housing solely as a financial asset or investment vehicle rather than a social good. When we define success in the housing market only by the expectation of ever-rising prices, it skews incentives and policy decisions. Instead, we need to get back to the root understanding of housing as homes first and foremost.

The recent lawsuit against real estate agents and brokerages underscores the symptoms of a housing market and economy that has lost its way. Limiting supply and driving up rates alone won’t solve this complex issue. We need a more balanced approach that makes home ownership accessible and affordable over the long-term. Only then can we get back on track towards a healthy market.