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The housing market has a problem\u2014millions of them. The country is short between 3.5 and 5.5 million housing units<\/a>, according to various estimates. The roots of the shortage go back to the aftermath of the Global Financial Crisis<\/a>, when cautious developers were hesitant to invest in new construction and set a precedent of undersupply that\u2019s continued to now. Jerome Powell.\u00a0<\/p>\n On Thursday, the Federal Reserve chair testified to the Senate Banking Committee against the backdrop of his recent decision not to cut interest rates, the big question investors and homebuyers are asking. Potential rate cuts have given investors hope about some much-needed relief for the housing market, which has struggled to cope with soaring mortgage and refinancing rates, but Powell testified that the housing market\u2019s real problems run much deeper\u2014and it will take more than just monetary policy to fix them.<\/p>\n \u00a0\u201cThe housing market is in a very challenging situation right now,\u201d Powell said on Capitol Hill on Thursday. \u201cProblems associated with low rate mortgage [lock-in] and high [mortgage] rates and all that, those will abate as the economy normalizes and as rates normalize,\u201d he said, referring to the mismatch between something approaching 90% of homeowners with mortgage rates below 6%<\/a> and the current market offering above 7%. \u201cBut we\u2019ll still be left with a housing market nationally, where there is a housing shortage.\u201d<\/p>\n Powell explained the current problems facing homebuyers and sellers to the committee: \u201cYou have a shortage of homes available for sale because many people are living in homes with a very low mortgage rate and can\u2019t afford to refinance, so they\u2019re not moving, which means the supply of regular existing homes that are for sale is historically low and a very low transaction rate,\u201d Powell said. \u201cThat actually pushes up the prices of other existing homes, and also of new homes, because there\u2019s just not enough supply.\u201d<\/p>\n But it\u2019s a bigger issue than buyers and sellers being locked in, he said. \u201cThere are a ton of things happening \u2026 because of higher rates, and those in the short-term are weighing on the housing market \u2026 it\u2019s more difficult [for builders] to get people [labor] and materials,\u201d Powell said. \u201cBut as [mortgage] rates come down, and that all goes through the economy, we\u2019re still going to be back to a place where we don\u2019t have enough housing.\u201d<\/p>\n The pandemic only made things worse. High inflation has made materials and labor costs far pricier, and ballooning mortgage rates have pumped the brakes on an already-slow sector. National Association of Realtors data showed that there were only 3.2 months of available housing supply<\/a> as of the end of last year, about half as much as there should be<\/a> in a balanced market.<\/p>\n Markets expect the Fed to announce rate cuts this year<\/a>\u2014but while that will offer some short-term relief, it won\u2019t solve the housing market\u2019s deep\u2013set supply problems.<\/p>\n Powell noted that restrictive zoning laws play an important role in limiting new construction. He also pointed out that rising mortgage rates have discouraged longtime homeowners who locked in lower rates from moving, which has limited the number of existing homes on the market and left new homebuyers struggling to find affordable options.\u00a0<\/p>\n Powell\u2019s threading a tricky needle\u2014the housing market is a big driver of the domestic economy, and overstressing it by keeping interest rates high for too long could threaten the rest of the economy. On the other hand, cutting rates too soon\u2014or too quickly\u2014in line with the industry\u2019s demands could undermine the Fed\u2019s yearslong attempts to stick a soft landing and keep inflation under control.\u00a0<\/p>\n \u201cHousing activity accounts for nearly 16% of GDP according to NAHB estimates,\u201d wrote a group of housing industry trade organizations in a letter to Powell last fall. \u201cWe urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid.\u201d<\/p>\n<\/div>\n\n\u2018There are a ton of things happening\u2019<\/h2>\n
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