While inflation has corroded the economy across the board, with prices up 18.5% overall, no market has spiraled quite as out of control as housing. As I detailed in the last installment of Tiana’s Take in the Washington Examiner magazine, unlike the rest of the economy, where the Federal Reserve’s monetary tightening has succeeded in massively slowing price hikes, average and median home price sales have only fallen by 11% in the past year despite skyrocketing by 48% from the peak of the pandemic to the beginning of 2022.
President Joe Biden has offered a solution in search of a problem because he is either unwilling or unable to understand that while local zoning laws are responsible for constraining supply, his fiscal policy is to blame for the Fed’s necessary response of the highest federal funds rate in 23 years, which in turn results in the some of the highest mortgage rates in two decades.
To exacerbate the worst-of-both-worlds mismatch between supply and demand in the housing market, Biden has bragged he will offer $5,000 per year for two years to first-time, “middle-class” homebuyers and a one-year credit for $10,000 for families who sell their so-called starter homes. The White House boasts that the former proposal, which was announced during Biden’s State of the Union address, would be tantamount to lowering a buyer’s effective mortgage rate by at least 1.5 percentage points.
The obvious critique of this proposal, which I previously explained in detail, is that reducing the effective mortgage rate of buyers is the opposite of what the Fed needs to happen in order to win its war on inflation. But perhaps the more meaningful reason Biden’s proposals, especially the latter, are so moronic is that they ignore that independent of the Fed’s wishes, neutral interest rates have reverted away from the near-zero levels of the decade following the Great Recession and to “higher for longer,” perhaps permanently.
Even before Biden’s spending boondoggle, our aging population portended higher neutral interest rates because of retiring boomers’ strain on public debt, a shrinking labor force reducing demand for loans, and an increase in savings normally seen by retirees. But Biden’s unprecedented $2 trillion spending spree accelerated the timeline and exacerbated the scope of this phenomenon. Combined with some of the more justified COVID-19 stimulus measures, home prices soared, allowing boomers to cash out and retire early from the labor force altogether.
The result? The most consequential game of musical chairs in modern American history. Anyone who secured a mortgage before the summer of 2022 locked in a rate we will likely never see in this country again, while everyone else is either stuck with a mortgage rate more than twice the pre-2022 levels or locked out of home ownership entirely.
All of which is to say, the mere math illustrates the lunacy of believing a one-time, $10,000 credit will encourage the lucky folks, those who secured a mortgage before the music stopped and the rate hikes started, to sell. Here is an example.
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The median sales price of a home sold at the beginning of 2021 was $369,800, and the average rate for a 30-year fixed mortgage was 2.7%. Assuming a buyer puts 20% down, he or she would wind up spending $136,131.20 in total interest over the course of 30 years. Now consider today’s median home sale price of $417,700 and today’s average 30-year fixed rate of 6.87%. A buyer putting 20% down would instead wind up paying nearly half a million dollars just on interest payments.
Biden is banking that consumers are just as bad at math as he is, but luckily for the rest of us, most prospective homebuyers understand that a $10,000 credit does not offset a $300,000 increase in total interest payments.