Housing is Unaffordable for Young People

[Joe Flacco]

What finally caused rates to move higher is 5.8% GDP growth rate and 4.7% inflation rate in 2021.

And now with rates where they are, we are back to around 2-3% GDP growth rate and inflation. Again, the data shows that the rate is right around where it should be.

 

[The Bob]

IMO rates were def kept at artificially low levels. All because no one wants to own a recession, a necessary cycle in the economy.
With rates at or very near 0 for over a decade the Fed basically said capital had no value. Imagine saying labor had no value.

The US federal funds rate, a key interest rate, was kept near zero from December 2008 through December 2015, and again from March 2020 until March 2022, totaling about 12.75 years.

Zero interest-rate policy - Wikipedia

en.wikipedia.org

 

[The Bob]

If the Fed had followed historic trends, rates should have been around 3-5%, slightly above the rate of inflation.

 

[Joe Flacco]

Bob, the major recession is what caused the low rates. Without the low rates where they were, we were looking at Great Depression 2.0.

 

[Joe Flacco]

The last time we had a decent economy was the 90's, which averaged around 4% GDP growth rate.

I gotta tell you, as a person in 40's, I would really like to experience a "roaring" economy. Something like the 60's when the decade averaged around 5.5% per year.

So in that regard, I think rates should be lower and see the economy run hot. Give me higher growth and higher inflation. I'm all for it.

 

[CGinMN]

Isn't it true that mortgage spreads would have been higher since 2009 if not for Fed actions with QE? The funding rate is only part of the equation, MBS holdings impact the mortgage rates as well.

 

[Mark K]

What about that scenario makes you think that rates should have been higher than where it was during that time?

Because the Fed keeping interest rates hovering around 0% for an extended period is the definition of artificially low. 0% rates should be reserved for short term, catastrophic economic conditions, conditions that were not in effect for most of that time, 9-11 excluded. Mtg rates of 2-3% resulted in housing price inflation; buyers didn't care much about prices because their payments were artificially low compared to historical rates.

I doubt that we'll agree on this but IMO 2-3% mtg interest rates caused the problems we're seeing today and, short of a recession, I don't see prices coming down to a level where the avg. income buyer can afford to buy a home in many areas of the country. Arkansas excluded.

 

[Terrel L. Shields]

the major recession is what caused the low rates

But did the low rates really stop recession? Would higher rates have kept speculation down? Low rates rewarded speculators and punished savers and the elderly. Old people should not be in higher risk investments. They need fixed rates. And at 1% fixed rates they were losing money. Otherwise, they had to take risks they were too old to recover from if the worst happened. Our local cemetery association was paying its own way with interest bearing CDs until 2000. After that, it took cash donations to pay for mowing and maintenance. And slowly we had to pay bills with our CDs principle. At some point our cash is now insufficient to cover the expenses it bites into that principle. It should be against the law for the Fed to drop rates below 3% without a vote of congress.

And we don't know if the economy would recover quickly without taking interest rates to near zero, because the Fed is too much coward to even try - so no one has done it.

 

[Joe Flacco]

Because the Fed keeping interest rates hovering around 0% for an extended period is the definition of artificially low. 0% rates should be reserved for short term, catastrophic economic conditions, conditions that were not in effect for most of that time, 9-11 excluded. Mtg rates of 2-3% resulted in housing price inflation; buyers didn't care much about prices because their payments were artificially low compared to historical rates.

I doubt that we'll agree on this but IMO 2-3% mtg interest rates caused the problems we're seeing today and, short of a recession, I don't see prices coming down to a level where the avg. income buyer can afford to buy a home in many areas of the country. Arkansas excluded.

We didn't have 2-3% mortgage rates during the 2010's. Mortgage rates were 3% to 5% during that time.

Again. I encourage you to actually compare rates and changes in home prices. It is when rates are high and moving higher that you see a higher rate of appreciation for home prices.

 

[Mark K]

Give me higher growth and higher inflation. I'm all for it.

Me and a few others here remember the 70's. High inflation, 13% mortgage, 16% cd rates. Not as much fun as you might think.

In the Feds decisions to micro-manage the economy, keeping inflation/job/GDP, etc within certain ranges, they prevent natural cycles of minor booms/busts. In doing so they generally lead the economy to a major bust.

Let the markets set the rates, not the Feds. Their constant meddling is never good.