Senator Elizabeth Warren thinks she knows exactly what will ease—if not fix—what she calls a “full-blown housing crisis.” Earlier this month, she posted to X, saying, “There are a lot of ways to measure it, but I’ll start with the most basic: We are 7 million units short of what we need to house people. What can we do? Increase the housing supply. It’s plain old Econ 101.”
But more recently, Warren stumbled on a fix separate from the worst housing inventory situation in decades. The Massachusetts senator and three of her counterparts wrote a letter to Federal Reserve Chair Jerome Powell, ahead of the central bank’s meeting this week, expressing concern about “the current state of the housing market and ongoing concerns that high interest rates have aggravated the country’s persistent crisis of housing access and affordability.”
The senators note that mortgage rates reached a more than two-decade high over the past year and argue that it’s a “direct result” of the Fed’s actions. While leaving interest rates unchanged in September and December was welcome, they add, mortgage rates are still too high for families wanting to buy their first homes. Warren and the other lawmakers also suggested that the Fed’s actions resulted in higher rents and reductions in new home and apartment building, apart from simply making it more costly to buy a home.
“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,” the senators wrote.
The average 30-year fixed mortgage rate is 6.88%, which is still significantly higher than the 3% mortgage rates we saw throughout the pandemic, as Warren pointed out in her letter. The senators wrote that the “direct effect of these astronomical rates” was a significant increase in purchasing costs. From December 2021 to December 2022, they said, the average monthly payment rose from $1,400 to $2,045, “a staggering 46% increase.” Even as mortgage rates have lessened, the average monthly payment is $2,883, the letter read.
“High interest rates have also worsened our nation’s housing supply crisis,” they wrote. “As mortgage rates have gone up, the price of home listings has not significantly dampened. Rather, a decade-long dearth of supply (exacerbated by a complete suppression of home building at the onset of the COVID-19 pandemic) has kept costs high on homes across the country.”
To Warren’s point, in 2023, existing home sales fell to their lowest level in nearly 30 years, largely due to the lock-in effect, a phenomenon that refers to homeowners holding onto their homes instead of selling for fear of losing their low mortgage rates. The lock-in effect kept supply tight in an already underbuilt housing market, and therefore generally kept home prices up, as Warren mentioned.
Either way, there are several estimates on the housing deficit, with some showing the country is short of somewhere between 3.5 million to 5.5 million homes. And the act of cutting interest rates alone won’t solve the housing crisis—more homes need to be built, it’s as simple as that. But Warren and her colleagues write that, “in response to high interest rates and higher construction costs, developers have opted either to pivot to developing smaller properties or have chosen to pull back on construction.” That may be partly true, but again, high interest rates aren’t solely at fault.
Redfin’s chief economist, Daryl Fairweather, in response to Warren, wrote on X: “Lower rates would make housing more affordable in the SHORT RUN. Begging politicians to take a long term approach to housing.”
Nevertheless, Warren and the other democratic senators go on to address how higher interest rates have also affected the rental market (which has seen rents fall slightly, but are much higher than pre-pandemic levels). Their reasoning being, more and more would-be buyers are continuing to rent having been priced out of buying, and “high interest rates mean higher mortgage rates for landlords, who may pass off these costs in the form of rent hikes for their tenants.”
But this isn’t Warren’s first tangle with Powell—and it’s far from her first criticism of his Fed’s series of interest rate hikes.
‘A dangerous man’
Inflation hit a four-decade high in June 2022, and Powell’s Federal Reserve responded. The central bank raised interest rates several times throughout 2022 and last year, and inflation did fall afterward, but not every economist agrees that correlation was causation in this instance.
Warren has criticized Powell dating back to 2018, at least, when she expressed concern over his nomination—and then again in 2021, over his renomination, when she called him a “dangerous man” to lead the central bank, although that was about his stance on financial regulation. As the economy has weathered the highest inflation rates in 40 years, Warren has shifted to the subject of interest rates and repeatedly accused Powell’s interest rate hikes of having the potential to throw the economy into a recession. On one occasion, in an analogy of her own making, Warren said, “the Fed has seized on aggressive rate hikes—a big dose of the only medicine at its disposal—even though they are largely ineffective against many of the underlying causes of this inflationary spike.” On another, she said Powell had “failed” in dealing with monetary policy.
The direst predictions about recession have not come to pass, or at least not yet, putting these comments about “failure” and “aggressive rate hikes” in a different light. But Warren is not alone in wishing for interest rate cuts—it is the big question on the mind of every investor watching the daily movements of stocks. Still, Powell’s success is measured in not just the American economy’s soft landing, but the whole world’s trajectory in that direction, as the IMF’s chief economist said to reporters on Tuesday.
Still, the ever-growing affordability crisis, as Warren and her colleagues put it, places a disproportionate burden on Black and Hispanic families with lower homeownership rates. “Home-ownership is a well documented means of wealth creation, and the further exclusion of historically disenfranchised groups from home-ownership will only widen our country’s pronounced racial wealth gap,” the senators wrote. They concluded by yet again urging the Fed to revise its aggressive interest rate hikes, which the central bank has signaled it is ready to do.
Next, the central bank will actually have to do it.