The American dream of homeownership is looking more like a nightmare.
With inflation heating up again, the Federal Reserve is in no position to consider lowering interest rates at its upcoming meetings. That's helped push the average fixed rate on 30-year mortgages above 7.2% after five straight weeks of increases.
Consumers aren't expecting mortgage rates to come down any time soon. Over the next year, they anticipate that mortgage rates will rise to nearly 9%. Over the next three years, they expect rates that are close to 10%. That's according to a New York Fed survey gauging consumers' expectations of the housing market, released Monday.
On top of that, households are bracing for a resurgence in home prices over the next year after they had started to ease back last year.
But here's the catch: Renting is also far from a bargain these days. Consumers are gearing up for even bigger increases compared to the expected rise in mortgage rates over the next year, the New York Fed survey found.
The issue of rent affordability is particularly pronounced in New York City, where housing costs have always been notoriously high compared to other parts of the country, absent a brief respite during the pandemic.
But what's making the burden weigh even heavier is rents in the city grew seven times faster than wages last year, according to an analysis Zillow published Tuesday. That's the biggest gap across 50 of the nation's largest metro areas. Nationally, however, Americans' wages increased at a faster pace than their rents last year.
The Fed's role: The strong jobs market the Fed has sought to preserve while reining in inflation is working against New York City renters, Kenny Lee, a senior economist at Zillow-owned StreetEasy, said in a statement on Tuesday. That's because new home construction in the city is especially struggling to keep up with the demand coming from the availability of jobs.
Would the situation be any different had the Fed been quicker to raise interest rates to fend off rising inflation back in 2022 when it hit a multi-decade high?
"It's possible that inflation would have gotten back to target quicker if the Fed had hiked sooner," Aditya Bhave, senior US economist at Bank of America, told CNN. If that happened, the central bank may not have needed to keep rates at the current high levels for so long.
That could have helped prevent mortgage rates from rising as high as they are now because, as Minneapolis Fed President Neel Kashkari said in a Bloomberg TV interview Tuesday, housing is "traditionally the most interest-rate-sensitive sector of the economy."
However, Bhave said "hindsight is 20/20 and a lot of the inflation was caused by supply disruptions that the Fed couldn't have prevented."
The other side of the equation is that had the Fed not kept interest rates at near-zero levels for two years, many current homeowners who locked in low rates wouldn't have been able to afford to own a home.
One of the dangers now is that the many Americans delaying plans to buy a home may not "get to participate in home value appreciation, which could affect the distribution of wealth in the long run," Bhave said.
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