Why Jerome Powell says the Fed alone can’t fix the broken housing market

Want more housing market stories from Lance Lambert’s ResiClub in your inbox? Subscribe to the ResiClub newsletter. Speaking to reporters last week, following the announcement of the start of the rate-cutting cycle, Fed Chair Jerome Powell stressed that while normalizing inflation and interest rates is important, it alone won’t solve the housing market’s affordability strain. “The housing market, it’s hard to game that out,” said Powell, citing the lock-in effect. “The housing market is, in part, frozen because of lock-in, lower rates, people don’t want to sell their home because they have a very low mortgage and it would be quite expensive to refinance.” Powell pointed to housing supply and zoning restrictions as being the real problems contributing to the strain on housing affordability. “As rates come down, people will start to move more, and that is probably beginning to happen already,” he explained. “But remember, when that happens, you’ve got a seller but you also got a new buyer in many cases. So it is not obvious how much additional demand that would make. The real issue with housing is that we have had, and are on track to continue to have, not enough housing. And so it’s going to be challenging, it’s hard to zone lots in places people want to live.” Powell also noted that the housing supply problem isn’t one that the Fed can address. “All of the aspects of housing are far more difficult, and where are we going to get the supply?” he said, “And this is not something the Fed can really fix.” Still, he noted, lowering interest rates could help somewhat. “As we normalize rates, I think you’ll see the housing market normalize,” he said. “Ultimately, by getting inflation broadly down and rates normalized and getting the housing cycle normalized, that is the best thing we can do for householders. And the supply question will have to be dealt with by the market, and also by the government.” This isn’t the first time Powell has pointed to a lack of homebuilding as the underlying problem in the U.S. housing market. Back in November 2022, he said that while excess pandemic housing demand had made home prices bubbly in many markets, the longer-term issue was under-building: “Coming out of the pandemic, [mortgage] rates were very low. People wanted to buy houses. They wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing. So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand . . . None of this [slowdown] affects the longer run issue, which is that we got a built-up country and it’s hard to get zoning and hard to get housing built in sufficient quantities to meet the public’s demand . . . There’s a longer run housing shortage.” And in March 2024, while speaking before Congress, Powell once again pointed to zoning problems and a lack of building as the underlying issue in the U.S. housing market: “The housing market is in a very challenging situation right now. You have this longer run housing shortage, but at the same time, you have a bunch of things that have to do with the pandemic and inflation and [the Fed’s] response with higher rates. You have a shortage of homes available for sale because many people are living in homes with a very low mortgage rate and can’t afford to refinance, so they’re not moving, which means the supply of regular existing homes that are for sale is historically low and a very low transaction rate. That [all] actually pushes up the prices of other existing homes and also of new homes because there’s just not enough supply. The builders are pushing, but they’re running into all kinds of supply issues still around zoning and workers and things like that . . . I will say the first problem is a longer run problem. The other problems associated with low rate mortgage [lock-in] and high [interest] rates and all that, those will abate as the economy normalizes and as rates normalize. But we’ll still be left with a housing market nationally, where there is a housing shortage.” Powell’s view—that the nationally aggregated housing market is under-built—is a fairly commonly held view, backed up by studies from 11 different research firms. In particular, for entry-level single-family homes. “Over the last several years, our research on the housing supply deficit has been widely followed, and while we’ve seen housing inventory improve slightly, a substantial undersupply still exists and remains one of the most significant obstacles facing the housing market today,” Len Kiefer, deputy chief economist at Freddie Mac, told ResiClub in May. Just to bring housing-vacancy rates back to historic norms, the U.S. housing market would need 1.5 million housing units built and sitting empty, according to research published