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    Mortgage Rates and Inflation Could Draw Attention to the Fed This Election

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    The Federal Reserve is poised to cut rates in 2024 while moving away from balance sheet shrinking. Yet a key event looms in the backdrop: the election.This year is set to be a big one for Federal Reserve officials: They are expecting to cut interest rates several times as inflation comes down steadily, giving them a chance to dial back a two-year-long effort to cool the economy.But 2024 is also an election year — and the Fed’s expected shift in stance could tip it into the political spotlight just as campaign season kicks into gear.By changing how much it costs to borrow money, Fed decisions help to drive the strength of the American economy. The central bank is independent from the White House — meaning that the administration has no control over or input into Fed policy. That construct exists specifically so that the Fed can use its powerful tools to secure long-term economic stability without regard to whether its policies help or hurt those running for office. Fed officials fiercely guard that autonomy and insist that politics do not factor into their decisions.That doesn’t prevent politicians from talking about the Fed. In fact, recent comments from leading candidates suggest that the central bank is likely to be a hot topic heading into November.Former President Donald J. Trump, the front-runner for the Republican nomination, spent his tenure as president jawboning the Fed to lower interest rates and, in recent months, has argued in interviews and at rallies that mortgage rates — which are closely tied to Fed policy — are too high. It’s a talking point that may play well when housing affordability is challenging many American families.Still, Mr. Trump’s history hints that he could also take the opposite tack if the Fed begins to lower rates: He spent the 2016 election blasting the Fed for keeping interest rates low, which he said was giving incumbent Democrats an advantage.President Biden has avoided talking about the Fed out of deference to the institution’s independence, something he has referenced. But he has hinted at preferring that rates not continue to rise: He recently called a positive but moderate jobs report a “sweet spot” that was “needed for stable growth and lower inflation, not encouraging the Fed to raise interest rates.”The White House did not provide an on-the-record comment.Such remarks reflect a reality that political polling makes clear: Higher prices and steep mortgage rates are weighing on economic sentiment and turning voters glum, even though inflation is now slowing and the job market has remained surprisingly strong. As those Fed-related issues resonate with Americans, the central bank is likely to remain in the spotlight.“The economy is definitely going to matter,” said Mark Spindel, chief investment officer at Potomac River Capital and co-author of a book about the politics of the Fed.Fed policymakers raised interest rates from near zero to a range of 5.25 to 5.5 percent, the highest in 22 years, between early 2022 and summer 2023. Those changes were meant to slow economic growth, which would help to put a lid on rapid inflation.But now, price pressures are easing, and Fed officials could soon begin to debate when and how much they can lower rates. Policymakers projected last month that they could cut borrowing costs three times this year, to about 4.6 percent, and investors think rates could fall even further, to about 3.9 percent by the end of the year.Officials have also been shrinking their big balance sheet of bond holdings since 2022 — a process that can push longer-term interest rates up at the margin, taking some vim out of markets and economic growth. But officials have signaled in recent minutes that they might soon discuss when to move away from that process.Already, the mortgage costs that Mr. Trump has been referring to have begun to ease as investors anticipate lower rates: 30-year rates peaked at 7.8 percent in late October, and are now just above 6.5 percent.While the Fed can explain its ongoing shift based on economics — inflation has come down quickly, and the Fed wants to avoid overdoing it and causing a recession — it could leave central bankers adjusting policy at a critical political juncture.Jerome H. Powell, the Fed chair, was nominated to the role by former President Donald J. Trump, who quickly soured on Mr. Powell, calling him an “enemy.”Pete Marovich for The New York TimesFormer and current Fed officials insist that the election will not really matter. Policymakers try to ignore politics when they are making interest rate decisions, and the Fed has changed rates in other recent election years, including at the onset of the pandemic in 2020.“I don’t think politics enters the debate very much at the Fed,” said James Bullard, who was president of the Federal Reserve Bank of St. Louis until last year. “The Fed reacts the same way in election years as it does in non-election years.”But some on Wall Street think that cutting interest rates just before an election could put the central bank in a tough spot optically — especially if the moves occurred closer to November.“It will be increasingly uncomfortable,” said Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives, an economic research firm. Cutting rates sooner rather than later could help with those optics, several analysts said.And Mr. Spindel predicted that Mr. Trump was likely to continue talking about the Fed on the campaign trail — potentially amplifying any discomfort.Since the early 1990s, presidential administrations have generally avoided talking about Fed policy. But Mr. Trump upended that tradition both as a candidate and then later when he was in office, regularly haranguing Jerome H. Powell, the Fed chair, on social media and in interviews. He called Fed officials “boneheads,” and Mr. Powell an “enemy.”Mr. Trump had nominated Mr. Powell to replace Janet L. Yellen as Fed chair, but it did not take long for him to sour on his choice. Mr. Biden renominated Mr. Powell to a second term. Mr. Trump has already said he would not reappoint Mr. Powell as Fed chair if he was re-elected.Of course, this would not be the first time the Fed adjusted policy against a politically fraught backdrop. There was concern among some economists that rate cuts in 2019, when the Trump administration was pushing for them, would look like caving in. Central bankers lowered rates that year anyway.“We never take into account political considerations,” Mr. Powell said back then. “We also don’t conduct monetary policy in order to prove our independence.”Economists said the trick to lowering rates in an election year would be clear communication: By explaining what they are doing and why, central bankers may be able to defray concerns that any decision to move or not to move is politically motivated.“The key thing is to keep it legible and legitimate,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “Why are they doing what they are doing?” More

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    High Housing Prices May Pose a Problem for Biden

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    Buying a home is a less attainable goal for many young people, and rents are expensive. Could that dog Democrats in the 2024 election?Cameron Ambrosy spent the first weekend of December going to 10 open houses — purely for research purposes. The 25-year-old in St. Paul, Minn., has a well-paying job and she and her husband are saving diligently, but she knows that it will be years before they can afford to buy.“It is much more of a long-term goal than for my parents or my grandparents, or even my peers who are slightly older,” said Ms. Ambrosy, adding that for many of her friends, homeownership is even farther away. “There’s a lot of nihilism around long-term goals like home buying.”As many people pay more for rent and some struggle to save for starter homes, political and economic analysts are warning that housing affordability may be adding to economic unhappiness — and is likely to be a more salient issue in the 2024 presidential election than in years past.Many Americans view the economy negatively even though unemployment is low and wage growth has been strong. Younger voters cite housing as a particular source of concern: Among respondents 18 to 34 in a recent Morning Consult survey, it placed second only to inflation overall.Wary of the issue and its political implications, President Biden has directed his economic aides to come up with new and expanded efforts for the federal government to help Americans who are struggling with the costs of buying or renting a home, aides say. The administration is using federal grants to prod local authorities to loosen zoning regulations, for instance, and is considering executive actions that focus on affordability. The White House has also dispatched top officials, including Lael Brainard, who leads the National Economic Council, to give speeches about the administration’s efforts to help people afford homes.“The president is very focused on the affordability of housing because it is the single most important monthly expense for so many families,” Ms. Brainard said in an interview.Housing is “the single most important monthly expense for so many families,” noted Lael Brainard, director of the National Economic Council. Erin Schaff/The New York TimesHousing has not traditionally been a big factor motivating voters, in part because key market drivers like zoning policies tend to be local. But some political strategists and economists say the rapid run-up in prices since the pandemic could change that.Rents have climbed about 22 percent since late 2019, and a key index of home prices is up by an even heftier 46 percent. Mortgages now hover around 7 percent as the Federal Reserve has raised rates to the highest level in 22 years in a bid to contain inflation. Those factors have combined to make both monthly rent and the dream of first-time homeownership increasingly unattainable for many young families.“This is the singular economic issue of our time, and they need to figure out how to talk about that with voters in a way that resonates,” said Tara Raghuveer, director of KC Tenants, a tenant union in Kansas City, Mo., referring to the White House. The housing affordability crush comes at a time when many consumers are facing higher prices in general. A bout of rapid inflation that started in 2021 has left households paying more for everyday necessities like milk, bread, gas and many services. Even though costs are no longer increasing so quickly, those higher prices continue to weigh on consumer sentiment, eroding Mr. Biden’s approval ratings.While incomes have recently kept up with price increases, that inflationary period has left many young households devoting a bigger chunk of their budgets to rental costs. That is making it more difficult for many to save toward now-heftier down payments. The situation has spurred a bout of viral social media content about the difficulty of buying a home, which has long been a steppingstone into the middle class and a key component of wealth-building in the United States.That’s why some analysts think that housing concerns could morph into an important political issue, particularly for hard-hit demographics like younger people. While about two-thirds of American adults overall are homeowners, that share drops to less than 40 percent for those under 35.“The housing market has been incredibly volatile over the last four years in a way that has made it very salient,” said Igor Popov, the chief economist at Apartment List. “I think housing is going to be a big topic in the 2024 election.”Yet there are reasons that presidential candidates have rarely emphasized housing as an election issue: It is both a long-term problem and a tough one for the White House to tackle on its own.“Housing is sort of the problem child in economic policy,” said Jim Parrott, a nonresident fellow at the Urban Institute and former Obama administration economic and housing adviser. America has a housing supply shortfall that has been years in the making. Builders pulled back on construction after the 2007 housing market meltdown, and years of insufficient building have left too few properties on the market to meet recent strong demand. The shortage has recently been exacerbated as higher interest rates deter home-owning families who locked in low mortgage rates from moving.Some analysts think concerns about housing affordability could morph into an important political issue, particularly for hard-hit demographics like younger people.Mikayla Whitmore for The New York TimesConditions could ease slightly in 2024. The Federal Reserve is expected to begin cutting borrowing costs next year as inflation eases, which could help to make mortgages slightly cheaper. A new supply of apartments are expected to be finished, which could keep a lid on rents.And even voters who feel bad about housing might still support Democrats for other reasons. Ms. Ambrosy, the would-be buyer in St. Paul, said that she had voted for President Biden in 2020 and she planned to vote for the Democratic nominee in this election purely on the basis of social issues, for instance.But housing affordability is enough of a pain point for young voters and renters — who tend to lean heavily Democrat — that it has left the Biden administration scrambling to emphasize possible solutions.After including emergency rental assistance in his 2021 economic stimulus bill, Mr. Biden has devoted less attention to housing than to other inflation-related issues, like reducing the cost of prescription drugs. His most aggressive housing proposals, like an expansion of federal housing vouchers, were dropped from last year’s Inflation Reduction Act.Still, his administration has pushed several efforts to liberalize local housing laws and expand affordable housing. It released a “Housing Supply Action” plan that aims to step up the pace of development by using federal grants and other funds to encourage state and local governments to liberalize their zoning and land use rules to make housing faster and easier to build. The plan also gives governments more leeway to use transportation and infrastructure funds to more directly produce housing (such as with a new program that supports the conversion of offices to apartments).The administration has also floated a number of ideas to help renters, such as a blueprint for future renters’ legislation and a new Federal Trade Commission proposal to prohibit “junk fees” for things like roommates, applications and utilities that hide the true cost of rent.Some affordable housing advocates say the administration could do more. One possibility they have raised in the past would be to have Fannie Mae and Freddie Mac, which help create a more robust market for mortgages by buying them from financial institutions, invest directly in moderately priced rental housing developments. Ms. Raghuveer, the tenant organizer, has argued that the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, could unilaterally impose a cap on annual rent increases for landlords whose mortgages are backed by the agencies.But several experts said that White House efforts would only help on the margins. “Without Congress, the administration is really limited in what they can do to reduce supply barriers,” said Emily Hamilton, an economist at the Mercatus Center who studies housing.Republicans control the House and have opposed nearly all of Mr. Biden’s plans to increase government spending, including for housing. But aides say Mr. Biden will press the case and seek new executive actions to help with housing costs.While it could be valuable to start talking about solutions, “nothing is going to solve the problem in one year,” said Mark Zandi, chief economist of Moody’s Analytics and a frequent adviser to Democrats.“This problem has been developing for 15 years, since the financial crisis, and it’s going to take another 15 years to get out of it.” More

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    A 30-Year Trap: The Problem With America’s Weird Mortgages

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    Buying a home was hard before the pandemic. Somehow, it keeps getting harder.Prices, already sky-high, have gotten even higher, up nearly 40 percent over the past three years. Available homes have gotten scarcer: Listings are down nearly 20 percent over the same period. And now interest rates have soared to a 20-year high, eroding buying power without — in defiance of normal economic logic — doing much to dent prices.None of which, of course, is a problem for people who already own homes. They have been insulated from rising interest rates and, to a degree, from rising consumer prices. Their homes are worth more than ever. Their monthly housing costs are, for the most part, locked in place.The reason for that divide — a big part of it, anyway — is a unique, ubiquitous feature of the U.S. housing market: the 30-year fixed-rate mortgage.That mortgage has been so common for so long that it can be easy to forget how strange it is. Because the interest rate is fixed, homeowners get to freeze their monthly loan payments for as much as three decades, even if inflation picks up or interest rates rise. But because most U.S. mortgages can be paid off early with no penalty, homeowners can simply refinance if rates go down. Buyers get all of the benefits of a fixed rate, with none of the risks.“It’s a one-sided bet,” said John Y. Campbell, a Harvard economist who has argued that the 30-year mortgage contributes to inequality. “If inflation goes way up, the lenders lose and the borrowers win. Whereas if inflation goes down, the borrower just refinances.”This isn’t how things work elsewhere in the world. In Britain and Canada, among other places, interest rates are generally fixed for only a few years. That means the pain of higher rates is spread more evenly between buyers and existing owners.In other countries, such as Germany, fixed-rate mortgages are common but borrowers can’t easily refinance. That means new buyers are dealing with higher borrowing costs, but so are longtime owners who bought when rates were higher. (Denmark has a system comparable to the United States’, but down payments are generally larger and lending standards stricter.)Only the United States has such an extreme system of winners and losers, in which new buyers face borrowing costs of 7.5 percent or more while two-thirds of existing mortgage holders pay less than 4 percent. On a $400,000 home, that’s a difference of $1,000 in monthly housing costs.“It’s a bifurcated market,” said Selma Hepp, chief economist at the real estate site CoreLogic. “It’s a market of haves and have-nots.”It isn’t just that new buyers face higher interest rates than existing owners. It’s that the U.S. mortgage system is discouraging existing owners from putting their homes on the market — because if they move to another house, they’ll have to give up their low interest rates and get a much costlier mortgage. Many are choosing to stay put, deciding they can live without the extra bedroom or put up with the long commute a little while longer.The result is a housing market that is frozen in place. With few homes on the market — and fewer still at prices that buyers can afford — sales of existing homes have fallen more than 15 percent in the past year, to their lowest level in over a decade. Many in the millennial generation, who were already struggling to break into the housing market, are finding they have to wait yet longer to buy their first homes.“Affordability, no matter how you define it, is basically at its worst point since mortgage rates were in the teens” in the 1980s, said Richard K. Green, director of the Lusk Center for Real Estate at the University of Southern California. “We sort of implicitly give preference to incumbents over new people, and I don’t see any particular reason that should be the case.”A ‘Historical Accident’The story of the 30-year mortgage begins in the Great Depression. Many mortgages at the time had terms of 10 years or less and, unlike mortgages today, were not “self-amortizing” — meaning that rather than gradually paying down the loan’s principal along with the interest each month, borrowers owed the principal in full at the end of the term. In practice, that meant that borrowers would have to take out a new mortgage to pay off the old one.That system worked until it didn’t: When the financial system seized up and home values collapsed, borrowers couldn’t roll over their loans. At one point in the early 1930s, nearly 10 percent of U.S. homes were in foreclosure, according to research by Mr. Green and a co-author, Susan M. Wachter of the University of Pennsylvania.In response, the federal government created the Home Owners’ Loan Corporation, which used government-backed bonds to buy up defaulted mortgages and reissue them as fixed-rate, long-term loans. (The corporation was also instrumental in creating the system of redlining that prevented many Black Americans from buying homes.) The government then sold off those mortgages to private investors, with the newly created Federal Housing Administration providing mortgage insurance so those investors knew the loans they were buying would be paid off.The mortgage system evolved over the decades: The Home Owners’ Loan Corporation gave way to Fannie Mae and, later, Freddie Mac — nominally private companies whose implicit backing by the federal government became explicit after the housing bubble burst in the mid-2000s. The G.I. Bill led to a huge expansion and liberalization of the mortgage insurance system. The savings-and-loan crisis of the 1980s contributed to the rise of mortgage-backed securities as the primary funding source for home loans.By the 1960s, the 30-year mortgage had emerged as the dominant way to buy a house in the United States — and apart from a brief period in the 1980s, it has remained so ever since. Even during the height of the mid-2000s housing bubble, when millions of Americans were lured by adjustable-rate mortgages with low “teaser” rates, a large share of borrowers opted for mortgages with long terms and fixed rates.After the bubble burst, the adjustable-rate mortgage all but disappeared. Today, nearly 95 percent of existing U.S. mortgages have fixed interest rates; of those, more than three-quarters are for 30-year terms.No one set out to make the 30-year mortgage the standard. It is “a bit of a historical accident,” said Andra Ghent, an economist at the University of Utah who has studied the U.S. mortgage market. But intentionally or otherwise, the government played a central role: There is no way that most middle-class Americans could get a bank to lend them a multiple of their annual income at a fixed rate without some form of government guarantee.“In order to do 30-year lending, you need to have a government guarantee,” said Edward J. Pinto, a senior fellow at the American Enterprise Institute and a longtime conservative critic of the 30-year mortgage. “The private sector couldn’t have done that on their own.”For home buyers, the 30-year mortgage is an incredible deal. They get to borrow at what amounts to a subsidized rate — often while putting down relatively little of their own money.But Mr. Pinto and other critics on both the right and the left argue that while the 30-year mortgage may have been good for home buyers individually, it has not been nearly so good for American homeownership overall. By making it easier to buy, the government-subsidized mortgage system has stimulated demand, but without nearly as much attention on ensuring more supply. The result is an affordability crisis that long predates the recent spike in interest rates, and a homeownership rate that is unremarkable by international standards.“Over time, the 30-year fixed rate probably just erodes affordability,” said Skylar Olsen, chief economist for the real estate site Zillow.Research suggests that the U.S. mortgage system has also heightened racial and economic inequality. Wealthier borrowers tend to be more financially sophisticated and, therefore, likelier to refinance when doing so saves them money — meaning that even if borrowers start out with the same interest rate, gaps emerge over time.“Black and Hispanic borrowers in particular are less likely to refinance their loans,” said Vanessa Perry, a George Washington University professor who studies consumers in housing markets. “There’s an equity loss over time. They’re overpaying.”‘Who Feels the Pain?’Hillary Valdetero and Dan Frese are on opposite sides of the great mortgage divide.Ms. Valdetero, 37, bought her home in Boise, Idaho, in April 2022, just in time to lock in a 4.25 percent interest rate on her mortgage. By June, rates approached 6 percent.“If I had waited three weeks, because of the interest rate I would’ve been priced out,” she said. “I couldn’t touch a house with what it’s at now.”Mr. Frese, 28, moved back to Chicago, his hometown, in July 2022, as rates were continuing their upward march. A year and a half later, Mr. Frese is living with his parents, saving as much as he can in the hopes of buying his first home — and watching rising rates push that dream further away.“My timeline, I need to stretch at least another year,” Mr. Frese said. “I do think about it: Could I have done anything differently?”The diverging fortunes of Ms. Valdetero and Mr. Frese have implications beyond the housing market. Interest rates are the Federal Reserve’s primary tool for corralling inflation: When borrowing becomes more expensive, households are supposed to pull back their spending. But fixed-rate mortgages dampen the effect of those policies — meaning the Fed has to get even more aggressive.“When the Fed raises rates to control inflation, who feels the pain?” asked Mr. Campbell, the Harvard economist. “In a fixed-rate mortgage system, there’s this whole group of existing homeowners who don’t feel the pain and don’t take the hit, so it falls on new home buyers,” as well as renters and construction firms.Mr. Campbell argues that there are ways the system could be reformed, starting with encouraging more buyers to choose adjustable-rate mortgages. Higher interest rates are doing that, but very slowly: The share of buyers taking the adjustable option has edged up to about 10 percent, from 2.5 percent in late 2021.Other critics have suggested more extensive changes. Mr. Pinto has proposed a new type of mortgage with shorter durations, variable interest rates and minimal down payments — a structure that he argues would improve both affordability and financial stability.But in practice, hardly anyone expects the 30-year mortgage to disappear soon. Americans hold $12.5 trillion in mortgage debt, mostly in fixed-rate loans. The existing system has an enormous — and enormously wealthy — built-in constituency whose members are certain to fight any change that threatens the value of their biggest asset.What is more likely is that the frozen housing market will gradually thaw. Homeowners will decide they can’t put off selling any longer, even if it means a lower price. Buyers, too, will adjust. Many forecasters predict that even a small drop in rates could bring a big increase in activity — a 6 percent mortgage suddenly might not sound that bad.But that process could take years.“I feel very fortunate that I slid in at the right time,” Ms. Valdetero said. “I feel really bad for people that didn’t get in and now they can’t.” More

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    A Higher Monthly Payment, but Less Square Footage

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    Homebuilders are responding to rising interest rates with an innovation: a small house in the traditionally spacious exurbs.The American home is shrinking.With interest rates rising and mortgage costs with them, homebuilders are pulling in yards, tightening living rooms and lopping off bedrooms in an attempt to keep the monthly payment in line with what families can afford. The result is that new home buyers are paying more and getting less, while far-flung developments where people move for size and space are now being reimagined as higher-density communities where single-family houses have apartment-size proportions.In a recent survey of architects, John Burns Research and Consulting found that about half expected their average house size to decline. New communities will have more duplexes or small-lot single-family homes that are just a few feet apart. Even in Texas, where land is abundant, builders are adding more homes per acre, the company found.“The monthly payment matters more than anything else and builders have responded with smaller, more efficient homes,” said John Burns, the company’s chief executive.Consider Hayden Homes, a Pacific Northwest builder that focuses on small towns and exurbs where middle-class families (its typical buyer has a household income of $90,000 a year) have historically traded more house for a longer commute.Two years ago, when interest rates were low, the average Hayden home was a 1,900 square-foot three-bedroom that cost $500,000, or about $2,000 a month, said Steve Klingman, the company’s president, in an interview. This assumed a 5 percent down payment and a 30-year fixed-rate mortgage with a 3 percent interest rate.Now, as borrowing costs consume more of buyers’ mortgage payments, Hayden is lowering prices and square footage to keep customers’ payments stable. The average Hayden home is now 1,550 square feet and costs about $400,000, or $2,100 a month, Mr. Klingman said. To buy it, however, a customer has to produce a 10 percent down payment and, even with incentives, is paying a 6 percent rate on a 30-year fixed-rate mortgage.“We are reconfiguring our floor plans, our features and community design all to get to that payment buyers can afford,” Mr. Klingman said. “People want to own if we can make it attainable.”In dense areas like Southern California, the high cost of land has long led developers to focus on compact homes. Trade-offs like a side yard instead of a backyard, or a garage that opens to the street instead of a driveway, have compressed size and reduced cost. Now those kinds of urban designs are arriving in the exurbs.For instance, in Hayden’s hometown, Redmond, Ore., a city of 35,000 about 30 minutes from Bend, Ore., its Cinder Butte Village development now has homes as small as 400 square feet (a one-bedroom, one-bath with a garage on the back alley). The average is around 1,000 — half the typical home size in the community two years ago.Mr. Klingman expects smaller homes to drive the market in the coming years. Hayden shifted all of its floor plans down as mortgage rates started rising and has prototypes for new communities that are twice as dense as the ones it built during the pandemic.“I think this is for the long haul,” Mr. Klingman said.In Cinder Butte Village, new homes will be much closer together than those built a few years ago.Amanda Lucier for The New York TimesNew homes are a tiny slice of the U.S. housing stock — builders started about 1.5 million houses and apartments last year, while 142 million already existed — but since they are built in every market and bought almost entirely with mortgages, their size and cost are relatively sensitive to changes in the economy. This makes fresh construction a useful picture of how families are affected by higher borrowing costs.American families have for generations had more space than households elsewhere in the developed world, but their homes were shrinking even before interest rates rose. The median new U.S. home peaked around 2,500 square feet in 2015. Over the next five years, new homes shed about 200 square feet as costs rose, urban living boomed and smaller families became more common.The pandemic, with its rock-bottom interest rates, led to what seems poised to be a short-lived increase. As white-collar workers ditched their commutes, and home-based offices went from perk to necessity, builders added rooms and exurban subdivisions thrived.Today’s buyers are dealing with the hangover. The average rate on a 30-year fixed-rate mortgage has roughly doubled over the past two years, to 7.57 percent, according to Freddie Mac. This has all but frozen the market for existing homes by making buyers who locked in low rates reluctant to trade up or move, keeping home prices stable despite a huge increase in borrowing costs.The price that sellers will accept “is unusually high,” said Daryl Fairweather, chief economist at Redfin, the real estate brokerage. “They need somebody to buy them out of their mortgage.”The decline in the inventory of existing homes for sale has made new homes a much bigger slice of the market. New home sales have consumed about a third of the market this year, or double the level in 2019, according to Redfin.Homeowners who can’t get their price can always sit out the market. But homebuilders have to sell to survive. And in a market where borrowing costs are consuming more of their buyers’ payments, and after years of rising material and labor costs, that means selling less house.The cuts will not be equal. In its survey, the John Burns consultancy found that dining and children’s rooms are being sacrificed to preserve bigger kitchens and primary bedrooms. To do this, builders are replacing tubs with showers. They’re expanding kitchen islands so they double as a dinner table. Outdoor spaces are being connected by covered patios and wall-size sliding doors that make a smaller living room seem open.Bigger is still better, even if it only feels like it. More

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    Rates Are Jumping on Wall Street. What Will It Do to Housing and the Economy?

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    A run-up in longer-term interest rates could help the Federal Reserve get the economic cool-down it wants — but it also risks a bumpy landing.Heather Mahmood-Corley, a real estate agent, was seeing decent demand for houses in the Phoenix area just a few weeks ago, with interested shoppers and multiple offers. But as mortgage rates pick up again, she is already watching would-be home buyers retrench.“You’ve got a lot of people on edge,” said Ms. Mahmood-Corley, a Redfin agent who has been selling houses for more than eight years, including more than five in the area.It’s an early sign of the economic fallout from a sharp rise in interest rates that has taken place in markets since the middle of the summer, when many home buyers and Wall Street traders thought that borrowing costs, which had risen rapidly, might be at or near their peak.Rates on longer-term government Treasury bonds have been climbing sharply, partly because investors are coming around to the belief that the Federal Reserve may keep its policy rate higher for longer. That adjustment is playing out in sophisticated financial markets, but the fallout could also spread throughout the economy.Higher interest rates make it more expensive to finance a car purchase, expand a business or borrow for a home. They have already prompted pain in the heavily indebted technology industry, and have sent jitters through commercial real estate markets.The increasing pressure is partly a sign that Fed policy is working: Officials have been lifting borrowing costs since March 2022 precisely because they want to slow the economy and curb inflation by discouraging borrowing and spending. Their policy adjustments sometimes take a while to push up borrowing costs for consumers and businesses — but are now clearly passing through.New homes for sale in Mesa, Ariz. Mortgage rates are flirting with 8 percent, up from less than 3 percent in 2021.Caitlin O’Hara for The New York TimesYet there is a threat that as rates ratchet higher across key parts of financial markets, they could accidentally wallop the economy instead of cooling it gently. So far, growth has been resilient to much higher borrowing costs: Consumers have continued to spend, the housing market has slowed without tanking, and businesses have kept investing. The risk is that rates will reach a tipping point where either a big chunk of that activity grinds to a halt or something breaks in financial markets.“At this point, the amount of increase in Treasury yields and the tightening itself is not enough to derail the economic expansion,” said Daleep Singh, chief global economist at PGIM Fixed Income. But he noted that higher bond yields — especially if they last — always bring a risk of financial instability.“You never know exactly what the threshold is at which you trigger these financial stability episodes,” he said.While the Fed has been raising the short-term interest rate it controls for some time, longer-dated interest rates — the sort that underpin borrowing costs paid by consumers and companies — have been slower to react. But at the start of August, the yield on the 10-year Treasury bond began a relentless march higher to levels last seen in 2007.The recent move is most likely the culmination of a number of factors: Growth has been surprisingly resilient, which has led investors to mark up their expectations for how long the Fed will keep rates high. Some strategists say the move reflects growing concerns about the sustainability of the national debt.“It’s everything under the sun, but also no single factor,” said Gennadiy Goldberg, head of interest rate strategy at TD Securities. “But it’s higher for longer that has everyone nervous.”Whatever the causes, the jump is likely to have consequences.Higher rates have already spurred some financial turmoil this year. Silicon Valley Bank and several other regional lenders imploded after they failed to protect their balance sheets against higher borrowing costs, causing customers to pull their money.Policymakers have continued to watch banks for signs of stress, especially tied to the commercial real estate market. Many regional lenders have exposure to offices, hotels and other commercial borrowers, and as rates rise, so do the costs to finance and maintain the properties and, in turn, how much they must earn to turn a profit. Higher rates make such properties less valuable.The yield on the 10-year Treasury bond in August began a relentless march higher to levels last seen in 2007.Hiroko Masuike/The New York Times“It does add to concerns around commercial real estate as the 10-year Treasury yield rises,” said Jill Cetina, an associate managing director at Moody’s Investors Service.Even if the move up in rates does not cause a bank or market blowup, it could cool demand. Higher rates could make it more expensive for everyone — home buyers, businesses, cities — to borrow money for purchases and expansions. Many companies have yet to refinance debt taken out when interest rates were much lower, meaning the impact of these higher interest rates is yet to fully be felt.“That 10-year Treasury, it’s a global borrowing benchmark,” said Greg McBride, chief financial analyst for Bankrate.com. “It’s relevant to U.S. homeowners, to be sure, but it’s also relevant to corporations, municipalities and other governments that look to borrow in the capital markets.”For the Fed, the shift in long-term rates could suggest that its policy setting is closer to — or even potentially at — a level high enough to ensure that the economy will slow further.Officials have raised rates to a range of 5 to 5.25 percent, and have signaled that they could approve one more quarter-point increase this year. But markets see less than a one-in-three chance that they will follow through with that final adjustment.Mary Daly, president of the Federal Reserve Bank of San Francisco, said markets were doing some of the Fed’s work for it: On Thursday, she said the recent move in longer-term rates was equivalent to “about” one additional interest rate increase from the Fed.Yet there are questions about whether the pop in rates will last. Some analysts suggest there could be more room to rise, because investors have yet to fully embrace the Fed’s own forecasts for how long they think rates will remain elevated. Others are less sure.“I think we’re near the end of this tantrum,” Mr. Singh said, noting that the jump in Treasury yields will worsen the growth outlook, causing the Fed itself to shift away from higher rates.“One of the reasons that I think this move has overshot is that it’s self-limiting,” he said.Plenty of people in the real economy are hoping that borrowing costs stabilize soon. That includes in the housing market, where mortgage rates are newly flirting with an 8 percent level, up from less than 3 percent in 2021.In Arizona, Ms. Mahmood-Corley is seeing some buyers push for two-year agreements that make their early mortgage payments more manageable — betting that after that, rates will be lower and they can refinance. Others are lingering on the sidelines, hoping that borrowing costs will ease.“People take forever now to make a decision,” she said. “They’re holding back.”” More

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    U.K. Inflation Remains Stuck at 8.7 Percent

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    The rate, which had been expected to edge lower in May, shows that Britain’s cost-of-living crisis persists, and is likely to prompt the Bank of England to raise interest rates again.Britain’s inflation rate held steady in May, frustrating expectations that price increases would slow down, according to data released Wednesday, the day before the country’s central bank is widely expected to raise interest rates again.Consumer prices rose 8.7 percent from a year earlier, the same as in April, the Office for National Statistics said. Economists had forecast it would dip slightly. The data is likely to compound concerns that Britain’s cost-of-living crisis may intensify in the coming months as mortgage holders confront the burden of higher interest rates pushed through to tackle stubbornly strong inflation.The Bank of England on Thursday is expected to lift interest rates for a 13th consecutive time, by a quarter-point to 4.75 percent, the highest since early 2008.Last week, wage data showed pay growing faster than expected. On Wednesday, the statistics agency said core inflation, which excludes energy and food prices and is used to assess how deeply inflation is embedding in an economy, rose to 7.1 percent in the year through May, the fastest pace since 1992. Services inflation, an indicator that is closely watched by policymakers, climbed to 7.4 percent, from 6.9 percent in April.“The overwhelming impression is that this is a disappointing set of numbers that shows broad-based strength” in prices, Sandra Horsfield, an economist at Investec, wrote in an analyst note. “This is simply not good enough.”The rise in core inflation is “something that may cause some concern,” Grant Fitzner, the chief economist at the statistics agency, told the BBC.That’s because it has been pushed higher by price increases in services, such as at restaurants and hotels, much of it reflecting higher wage costs for companies, Mr. Fitzner said. “Services prices are quite sticky,” he said. “It can take longer for them to pick up but likewise longer for them to unwind as well.”This is leading to worries that overall inflation will be much slower to fall that it was to rise, he added.And that is what Britain is experiencing, as inflation data over the past few months has repeatedly defied expectations and stayed higher than predicted.Britain’s headline inflation rate has slowed from a peak of 11.1 percent in October, but it’s still uncomfortably high, especially compared with its international peers. In the United States, the Consumer Price Index rose 4 percent in May from the year before, and in the eurozone, inflation averaged 6.1 percent last month for the 20 countries that use the euro. The Federal Reserve has paused its interest rate increases, and traders are betting that the European Central Bank will raise rates just once or twice more; in Britain, though, investors are predicting the central bank will be forced to raise rates for longer to stamp out inflation.“We are in a situation now where markets are saying they’ve lost faith and that requires a big reaction from the bank,” said Andrew Goodwin, an economist at Oxford Economics. The central bank “needs to acknowledge that the game has changed,” he said, adding that he wouldn’t be surprised if the central bank raised rates by half a point on Thursday.Andrew Bailey, the governor of the Bank of England, said last week that policymakers still expected the inflation rate to come down, but “it’s taking a lot longer than expected.”Mr. Bailey’s predecessor, Mark Carney, said recently that Britain’s departure from the European Union was part of the reason Britain was suffering from stubbornly high inflation. There were other economic shocks at the same time, such as rising energy prices following Russia’s invasion of Ukraine, but Brexit is a “unique” part of the adjustment that will take years to resolve, he said.“We laid out in advance of Brexit that this will be a negative supply shock for a period of time and the consequence of that will be a weaker pound, higher inflation and weaker growth,” he told The Daily Telegraph last week.Traders are betting that the Bank of England’s interest rate could reach 6 percent by early next year. These expectations are shown through rising yields on government bonds, which now exceed the levels reached during Liz Truss’s brief but turbulent stint as prime minister last fall.In response, mortgage rates are rising too. Last weekend, the average rate for a two-year fixed-rate mortgage hit 6 percent for the first time this year.Last month, the central bank warned that many mortgage holders had not experienced the cost of higher interest rates yet. About 1.3 million households are expected to reach the end of their fixed-rate term by the end of the year, prompting a reset in the rate that applies to their loan. And the average mortgage holder in that group will see their monthly interest payments increase about 200 pounds ($255) a month, or £2,400 over the course of a year, if their mortgage rate rises 3 percentage points, which is what mortgage quotes suggested last month, the bank said.The additional financial strain follows months of higher prices, from energy bills to groceries. Food and nonalcoholic drink prices rose 18.3 percent in May from a year earlier, data showed on Wednesday, a slight slowdown from previous months when food inflation hit a 45-year high. The moderation in food and fuel prices was offset by rising prices at restaurants and hotels and for secondhand cars and live music events.“We know how much high inflation hurts families and businesses across the country,” Jeremy Hunt, the chancellor of the Exchequer, said in a statement on Wednesday, adding that the government’s plan to halve the rate of inflation would be the best way to keep costs and interest rates down.“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy,” he said.In January the government, led by Prime Minister Rishi Sunak, vowed to halve inflation by the end of the year, which would mean a rate of about 5 percent, amid waves of public and private sector strikes from workers frustrated by declining living standards.When that promise was made, it seemed almost guaranteed to succeed based on economic forecasts. But as the months have worn on, inflation has been harder to slow down than expected and that pledge is now at risk of being missed.Adding to the government’s challenges, separate data published on Wednesday estimated that Britain’s public sector debt exceeded 100 percent of gross domestic product for the first time since 1961, as the government paid out more money for energy support programs and social benefits to mitigate the cost-of-living crisis. More

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    Mortgage Transfers Pick Up as a Way to Beat Rising Rates

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    Real estate agents are pushing sub-3 percent mortgages as an amenity, just like marble countertops or a view of the mountains.The only goal was to not lose money.When Matthew Kilboy listed the Washington, D.C., condominium that he and his husband had bought in 2017, they accepted that higher interest rates and a soft market for condos meant any dollar over the $529,000 they had paid was a dollar they would thank their lucky stars for.A similar two-bedroom and two-bath unit in the building had recently gone for just under half a million. The $549,000 price they listed in April was basically a wish.A month later, the couple closed at $565,000 — thanks to a little-known amenity that has become increasingly popular as mortgage rates have risen. Their unit came with an assumable 30-year mortgage, with a 2.25 percent fixed rate that the couple had locked in after a November 2020 refinancing. By advertising that the buyer could inherit the mortgage, the couple, who have moved to Denver, got several over-asking-price bids that seemed like a relic from the warped real estate market during the Covid lockdown.“It was the very first sentence of the listing,” said Mr. Kilboy, 39, a former Navy nurse whose loan, backed by the Department of Veterans Affairs, could be passed to the buyer. “No one could find an interest rate that low, so we were really pushing it.”The Federal Reserve might have slowed interest rate increases, but monthly mortgage costs remain more than double their levels from 18 months ago. This has significantly lowered the supply of for-sale inventory by discouraging the millions of homeowners who locked in bargain rates during the pandemic from selling their home and incurring potentially hundreds of dollars a month in extra borrowing costs on a new one.Because so little is for sale, home prices have remained stable, and even resumed their ascent, despite a huge increase in borrowing costs. The refrain among real estate agents and economists is that anyone who secured a mortgage rate of 3 percent or lower owns a valuable asset that they are loath to give up.But every asset has a price. And now an emerging cadre of investors and real estate agents are trying to, in effect, sell mortgage rates from several years ago by transferring them to new buyers.Redfin, the real estate brokerage, has seen a steep rise in listings like Mr. Kilboy’s that have comments like “beautiful home with assumable loan at 3.25 percent.” Facebook groups have popped up to find buyers for them, while new companies are pitching services to speed up the transfer.“Homeowners with mortgages that are capable of being assumed have something valuable that many home buyers want and would be willing to pay for,” said Daryl Fairweather, chief economist at Redfin. “For people who bought when home prices were near the peak but mortgage rates were still low, it may be an attractive way to get out of a remorseful purchase.”The assumable mortgage on Matthew Kilboy’s previous home had a 2.25 percent fixed rate, making it very attractive to buyers.Benjamin Rasmussen for The New York TimesInvestors are just as eager: The euphemistic “creative finance” has become a huge topic of conversation on sites like BiggerPockets, a forum where landlords trade tips on topics like operating short-term rentals and buying a first investment property. In books, seminars and YouTube videos, influencers peddle advice on how to find struggling homeowners willing to transfer a low-rate mortgage without their bank’s knowledge — a valuable but immensely risky strategy that title companies say they’ve seen more of.“It’s just too appealing,” said Scott Trench, chief executive of Bigger Pockets, adding the disclaimer that many of these strategies frequently involve extra risks and paperwork that most people are unfamiliar with.From the pedestrian to the dodgy, it all seems to underscore the manner in which the nation’s real estate market has been frozen by regret. Buyers are resentful that the low-cost mortgages are gone. Sellers are reluctant to lower their prices from the peaks of the pandemic. In lieu of acceptance, a determined few are trying to use imagination and fine print to build a portal to the cheap-money days of 2021.Most U.S. mortgages are not directly assumable. However, a host of popular government-backed mortgages — such as those insured by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture — typically are, said Michael Fratantoni, chief economist at the Mortgage Bankers Association. These loans are frequently used by first-time buyers and account for roughly a quarter of outstanding mortgages, according to Black Knight, a mortgage technology and data provider.In theory, any of the millions of homeowners holding a assumable low-rate mortgage have a valuable perk to sell with their home. Still, real estate agents say it can be hard in practice to transfer them. For instance, homeowners who transfer a V.A.-backed mortgage can lose their ability to get another similar loan unless they can find a V.A.-eligible buyer to take their original mortgage.Or consider a homeowner who has a low-rate mortgage but has paid a chunk of it down: To assume the loan, a buyer would have to come up with a large down payment to account for the seller’s equity — something that very few people can do.Craig O’Boyle is hoping to create a business making assumptions faster and easier. Mr. O’Boyle is a real estate agent who has been selling homes in Colorado for three decades, long enough that he remembers having to read through the door-stopper contracts that buyers and sellers now just click through on DocuSign. Reading over the lines about certain loans being assumable, he said, he had long thought that if rates ever spiked those owners would suddenly discover that their debts had value.“And then here comes this shift in the interest rate market,” Mr. O’Boyle said.Last year, he and a partner started Assumption Solutions, a consulting firm that, for a $1,100-per-deal processing fee, helps real estate agents navigate transferring mortgages between sellers and buyers. In his pitch to agents, Mr. O’Boyle argues that they push sub-3 percent rates as they do marble countertops or a view of the mountains.“You market this, and let’s say you’re competing against the house next door, your house should sell either faster or for more money,” he said.Even for the vast majority of people using a conventional mortgage that can’t be transferred, some sort of rate compensation is becoming the norm. While home prices have fallen from their all-time high last June, they haven’t come down nearly enough to make up for the increase in mortgage rates, and they’re rising again.To stimulate new loans, mortgage companies have started marketing products in which borrowers can “buy down” rates by paying several thousand dollars for a year or two of significantly lower interest. One of the more popular products is a “2/1 buydown,” in which a borrower pays for an interest rate reduction of two percentage points during the first year and one percentage point in the second.Put simply: “Most homes are unaffordable at today’s rates,” said Luis Solis, a real estate agent in Phoenix and Portland, Ore.A majority of Mr. Solis’s recent deals have had some form of interest rate compensation that is a price cut in all but name, he said. Usually it’s a lump sum at closing that buyers use to buy temporarily lower rates. Sellers with a lot of equity can cut out the middleman and finance the buyer’s purchase below prevailing rates by acting as a lender — seller financing, it’s called.Assuming mortgages, paying down rates: These are creative but straightforward solutions to rising borrowing costs. But on the margins, a rising number of investors looking to buy homes with minimal cash are trying a gray technique of finance — known as “Subject to” or “Subto” — in which they try to find people who have fallen behind on their debts and make a side agreement to take over their (low-interest) payments. (The deal is said to be “subject to” an existing loan.)The strategy has obvious appeal when interest rates are high, but it comes with a huge asterisk: Once a home has changed hands, banks typically have the right to call the loan — that is, demand that the seller’s mortgage balance be paid in full immediately. Also, if the buyer falls behind on the payments, the property can be still foreclosed on — ruining the seller’s credit, for a home that he or she no longer owns.Despite this, Bill McAfee, president of Empire Title, said he has seen an increase in customers looking to change their title under these terms, and has stock disclosures warning both sides what can go wrong.“I’m not saying I agree with doing this, but it’s a way to get into property with very little money,” he said. “They have to figure out if it’s worth the risk.” More

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    Housing Market Gridlock: Buyers Are Eager, but Sellers Are Scarce

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    Homeowners with low-rate mortgages are delaying the decision to sell until market conditions change.The housing market typically comes to life in spring, when buyers emerge in the warmer weather. This year, the market appears stuck in a deep freeze, and the biggest culprit is a lack of sellers, housing experts say.There is interest among buyers — mortgage applications were up 10 percent in March from the month before — but the number of homes for sale is low. The mismatch is caused in part by homeowners who are inclined to sell but are sitting on the sidelines, scared off by the steep prices and mortgage rates that they would face as buyers.More than three-quarters of sellers in a recent survey by Realtor.com said they felt “locked in” to their home by their own low mortgage rate, according to a recent survey by Realtor.com. More than half said they planned to wait until rates fell before putting their homes on the market.Sandy Robinson, a 71-year-old retired teacher in Fairhaven, Mass., is daunted by the market. She would like to sell her two-bedroom townhouse but is worried about being able to afford a new home. “It’s a little scary now, and you have to be careful,” she said.A stalemate has mired the housing market, when it should be more robust. Sales of existing homes in March were down 22 percent from the year before, according to the National Association of Realtors. The inventory of unsold homes on the market at the end of March totaled 2.6 months’ supply, meaning it would take that long to sell them. Inventory is typically twice that amount to balance supply and demand.“We are in a real gridlock situation,” said Robert Frick, corporate economist at the Navy Federal Credit Union. “It’s going to be a tortuous process to unfreeze the market and take a long time to get back to a normal supply-and-demand situation.”Fewer homes for sale mean more competition among buyers, which leads to bidding wars and drives up prices. Although down from recent highs, the average price of a house remains about 40 percent higher than at the beginning of 2020, according to the S&P CoreLogic Case-Shiller index, which measures prices across the nation.“Everybody is a little surprised at the level of price resilience,” said Todd Teta, chief product and technology officer for Attom Data Solutions, a real estate analytics firm.Ellen Goldman and Sam Savage are looking to downsize from the Florida home they have lived in since 2004 but are in no rush to sell.Scott McIntyre for The New York TimesMatt Berger would like to sell his three-bedroom starter home in Lebanon, Ohio, where he lives with his wife and two young children, but is holding back. “It feels tight now, and will only get tighter as the kids grow,” he said.They are looking to move closer to Cincinnati, but homes they could afford a year ago are now out of their price range. Adding to the pressure is the low mortgage rate on their current home: “We are in the mid-threes” — roughly half the national average — “and I’d hate to have to say goodbye to that,” said Mr. Berger, 42.“It’s a doubly whammy of the higher interest rates and the home values being so high, and that is scaring us off,” he added. He and his wife are hoping that mortgage rates will fall and they find a cheaper home in a year or two, before their children are settled in school.The average rate on the most popular home loan, the 30-year fixed-rate mortgage, is 6.43 percent, Freddie Mac reported on Thursday, more than twice what it was two years ago. Mortgage rates peaked above 7 percent late last year, but the decline since then has been slow and uneven.To get sellers more motivated again, rates will have to fall to the “magic mortgage rate” of 5.5 percent, according to a survey by John Burns Research and Consulting. More than 70 percent of prospective home buyers told the researchers that they were not willing to accept a mortgage above that rate.“Homeowners seem to be pretty patient right now,” said Maegan Sherlock, a senior research analyst at John Burns. “Until things get a little better, those people are going to hold out,” she added.Most industry experts believe the tipping point is still a ways off. “This is going to be a transition year,” said Danielle Hale, the chief economist of Realtor.com. “As we move into 2024, we should see more people with an appetite to buy.”The market also may thaw as demand from frustrated buyers is met by home builders, which “historically created first-time home opportunities and move-up opportunities,” said Mr. Teta of Attom.A lack of inventory of existing homes appears to be pushing buyers to newly built homes, a smaller market where sales have held up better. Sales of new single-family homes jumped nearly 10 percent in March from the month before, according to the Census Bureau.The National Association of Realtors forecasts that sales of new homes will increase 4.5 percent this year and 12 percent in 2024. It expects existing-home sales to drop about 9 percent this year and then bounce back in 2024.And there are always reasons that reluctant homeowners could be compelled to sell, like job relocations, downsizing or divorce, said Iliana Abella, executive director of sales at the Abella Group, a real estate brokerage in Miami.“If you are planning to stay in your home for longer than five years, 6 percent is not going to kill you,” she said of current interest rates.Still, many homeowners are content to wait.Ellen Goldman, a 72-year-old retired lawyer in Naples, Fla., is looking to downsize. She and her husband, Sam Savage, have lived in their two-story home since 2004, but realize that the stairs will get more difficult as they age.“We both work out, and it’s not an issue,” Ms. Goldman said, adding that “we want to make the move now before it becomes too hard.”But they are in no rush. “We don’t have to do this,” she said, as they keep an eye on local prices. “We would be fine staying, too.” More