The Gravity-Defying Housing Market

Pent up demand for homes coupled with low inventory could complicate the Fed’s inflation fight

- Jonnelle Marte, with Catarina Saraiva

Federal Reserve officials are counting on higher mortgage rates to throw cold water on the frenzied housing market as they work to tame the highest inflation in decades. But the market may not cool fast enough.

While rising rates and higher home prices are starting to lock some buyers out and weaken sales, pent up demand for housing, combined with a stark shortage of homes on the market, is still putting upward pressure on prices. A dearth of inventory also means rising rates may not slow homebuilding activity as much as they have in the past.

The Fed, which is raising interest rates to curb inflation, is relying on higher borrowing costs on homes, cars, and other big-ticket items to put a damper on demand. Rising home prices boost construction and can lift consumer spending, by making homeowners feel wealthier. The median selling price of an existing home rose 15% in March from a year earlier, setting a new record, according to the National Association of Realtors.

“They’re not going to get the decline in economic activity through housing that they typically get, at least not as quickly as they typically get it,” says Mark Zandi, chief economist for Moody’s Analytics. “They may have to press on the brakes even harder.”

Fed Chair Jerome Powell and his colleagues on the Federal Open Market Committee elected to raise interest rates by 50 basis points at their May 3-4 meeting and signaled they’re on track to lift them to around 2.5% by the end of the year. But it’s not clear if that’ll be enough to tame inflation, which is running at more than three times the Fed’s 2% target.