Housing expert Jim Parrott and Moody’s Analytics chief economist Mark Zandi said the Fed’s interest rate hikes will help slow down overall home prices, but they will also hurt home prices as the cost of homeownership affects key indicators. Inflation remains high.
in a Washington post In an op-ed published on Thursday, they urged the Fed to “declare victory” over inflation and begin cutting interest rates. Central bank policymakers will meet next week and are expected to hold interest rates steady at a 23-year high.
Although consumer inflation has fallen sharply from its peak two years ago, it remains above the Fed’s 2% target, prompting Fed Chairman Jerome Powell to keep interest rates higher for longer.
But Parrott and Zandi said that stance was based on a “serious miscalculation.”
It’s derived from how the Personal Consumption Expenditures Deflator (the Fed’s preferred inflation measure) and the Consumer Price Index measure the cost of homeownership by estimating the rent of similar homes nearby.
This approach is flawed, they write, because most homeowners don’t have a mortgage or a fixed-rate mortgage, meaning their actual costs don’t change much. But because the inflation gauge estimates nominal rent based on real-world price increases paid by renters, homeowners’ hidden costs rise.
Additionally, Parrott and Zandi said it would be “virtually impossible” in communities where most homes are owner-occupied, or where most rental inventory serves multifamily residents and owner-occupied inventory serves single-family residents. Estimate implicit rent.
If the Fed abandoned this methodological quirk, inflation would reach its 2% target, they said.
At the same time, they added, the Fed’s aggressive interest rate hikes have made it more difficult to build new homes and discouraged homeowners from giving up low mortgage rates, exacerbating a tight housing market.
“The collapse of the housing supply pipeline is raising the cost of buying and renting, pushing up the inflation measures the Fed relies on,” Parrott and Zandi wrote. “The tools the Fed is using to suppress inflation are doing exactly the opposite. ”
Recent data shows rental prices recovering after cooling earlier this year. To easily afford rent, you need to make nearly $80,000 a year, up from less than $60,000 five years ago, according to Zillow.
While prices are showing signs of softening in some markets, data across the country still shows prices are rising.
Parrott and Zandi aren’t the only commentators who think the Fed is in trouble. Apollo chief economist Torsten Sløk said last month that central bankers are in a self-defeating cycle.
“You could call it the reflexive paradox of Fed rate cuts: the more insistent the Fed is that the next move is to cut rates, the looser financial conditions will be and the harder it will be for the Fed to cut rates,” he wrote.
