Ahead of its meeting this week, a group of U.S. Senators, including Elizabeth Warren (D-Mass.), John Hickenlooper (D-Colo.), Jacky Rosen (D-Nev.), and Sheldon Whitehouse (D-R.I.), is pressing Federal Reserve Chair Jerome Powell to reverse the interest rate hikes they believe are responsible for a surge in mortgage rates.
In the letter, the senators express their concern over the detrimental effects of high interest rates, which caused mortgage rates to reach a 20-year high last October. According to the senators, these rates have become a major roadblock, pushing the dream of affordable housing out of reach for countless individuals and families.
"The Fed’s decision to raise interest rates rapidly, and keep them high, has resulted in higher costs for home purchasers, higher rents, and reductions in new home and apartment building—and the job growth that comes with these investments," the senators wrote.
In the letter, the senators point out that the average rate on the 30-year fixed-rate mortgage skyrocketed to 8% in mid-October, a stark contrast to the historically low rates as low as 3% experienced in 2021. As a result, average monthly payments on 30-year fixed-rate mortgages surged by a staggering 46% from December 2021 to December 2022, climbing from $1,400 to $2,045. Today, these payments have further surged to a daunting $2,883, according to the senators.
The adverse effects of these interest rate hikes have extended to the housing supply crisis. Developers grappling with high interest rates and increased construction costs have been compelled to shift their focus towards smaller properties or reduce construction activities altogether. Additionally, the supply of existing homes has dwindled, as homeowners opt to stay put rather than face higher mortgage rates when purchasing new homes.
The senators underscore that high interest rates have played a significant role in driving up rent costs too. Renters are finding themselves trapped in their units, as the expense of constructing new rental units becomes prohibitive, leading to a further tightening of the rental market.
The senators also draw attention to the racial disparities exacerbated by the housing affordability crisis, with Black and Hispanic households facing significant challenges in homeownership.
"The ever-growing affordability crisis places a disparate burden on the shoulders of Black and Hispanic households, who own homes at rates 28.6 percentage points and 25.8 percentage points below white households respectively—disparities rivaling the racial homeownership gaps of the Jim Crow era," the senators wrote.
Given these concerns, the senators are urging the Federal Reserve to reverse its aggressive rate hikes to the federal funds rate in 2024. They contend that the Fed's monetary policy must take into account the struggles of families grappling with housing costs and prioritize achieving a balance that fosters affordable housing and economic stability.
