- ANALYSIS: President Trump is blaming Jerome Powell and the Federal Reserve are blamed for the housing slump, yet economists at JP Morgan and Morgan Stanley contend that current elevated mortgage rates aren't a direct result of the Fed's actions. Instead, they attribute this to the prolonged period of extremely low interest rates following the financial crisis, which artificially boosted home prices and severely impacted affordability. Even with several rate reductions by The Fed, mortgage rates are persisting at high levels because lenders are primarily disregarding monetary policy due to constrained housing inventory, increased purchasing during the pandemic, and a significant gap between policy rates and mortgage offerings not seen in decades.
The White House is using the housing crisis as a weapon against Fed chairman Jerome Powell. “Could somebody please inform Jerome ‘Too Late’ Powell that he is hurting the housing industry, very badly?” The president posted on Truth Social earlier this year. “People can’t get a mortgage because of him.”
TL;DR
- Experts suggest low interest rates post-financial crisis, not current Fed policy, caused housing affordability issues.
- Prolonged low rates artificially boosted home prices, making it harder for Millennials and Gen Z to buy.
- Constrained housing inventory and pandemic buying also contribute to high mortgage rates, despite Fed cuts.
- Local regulations and down payment challenges, not just federal policy, significantly impact housing affordability.
Trump's former housing chief called Powell a “maniac,” and Treasury Secretary Scott Bessent pointed to the Fed as the cause of a property crunch. He argued: “The biggest hindrance for housing is mortgage rates. If the Fed brings down mortgage rates, then they can end this housing recession.”
If only it were that simple.
Even though the Fed manages the short-term interest rate, which can somewhat impact mortgages over time, the market shows that lenders have shown minimal concern for The Federal Open Market Committee's (FOMC) actions.
“Despite 125 basis points of Fed cuts since September 2024, the spread between mortgage rates outstanding and new mortgage rates is over 2%, the highest in 40 years, indicating that more cuts may be necessary to spur housing activity,” Morgan Stanley wrote in a note at the end of October, before Powell delivered another cut.
Even then, mortgage rates have barely wobbled and still sit stubbornly at around 6.2%.
Economists cautioned that Powell’s—or any subsequent chair’s—impact on the property market is unlikely to reappear in the near future. Although the Federal Open Market Committee's (FOMC) decision to lower interest rates might stimulate consumer spending, it offers little solace to savers diligently accumulating funds for a crucial down payment, as reduced rates exacerbate their financial strain.
The Fed's actions are to blame for housing's issues, though not currently.
According to Dr. David Kelly, chief global strategist and head of the global market insights strategy team at JP Morgan Asset Management, the current Federal Reserve policy isn't responsible for the housing market's condition; rather, past Fed actions are the root cause.
“The Fed can be faulted for its behavior with regard to the housing market for many years, but the real fault is not that they are keeping rates too high today, it is that they kept rates way too low, for way too long, after the great financial crisis,” Kelly tells Coins2Day in an exclusive interview.
From late 2008 through the close of 2015, the U.S. Base rate remained virtually zero. It then rose to about 2.4% by 2019, only to be sharply reduced once more due to the COVID pandemic. According to Kelly, this led to “abnormally low mortgage rates” that persisted for an extended duration, “it encouraged everybody to buy a house and to bid up prices.”
He explained: “The question was never how much is this house worth, but how much can you afford? If mortgage rates are 3%, people could afford a lot. When the Federal Reserve normalized rates, they sort of snapped the trap shut.”
Purchasing a residence has grown more unaffordable for first-time buyers recently, even over the last several years. According to information from The National Association of Realtors, the housing affordability index in 2022 was 108, where 100 signifies a family with the typical income possessing precisely sufficient funds to secure a mortgage for a median-priced property. By 2025, this figure had fallen to 97.4, indicating that the typical family lacks the necessary income to qualify for a mortgage on a median-priced dwelling.
Moreover, the problem for many buyers isn’t necessarily paying the debt off over time; it’s gathering the all-important deposit needed to secure a mortgage in the first place. While zero-down-payment mortgages are widely offered in markets like the U.K., they are more exclusive in the U.S., typically reserved for buyers such as veterans and those purchasing in specific rural areas. For consumers who don’t qualify, it’s a big ask: A November study from Empower reported one in three Americans have around $500 in emergency savings, a key barrier to stockpiling more was the current cost of living.
Can the Fed help at all?
Under “normal” economic circumstances, a lower Fed rate should trickle through to lower mortgage lending, Morgan Stanley’s head of U.S. Policy, Monica Guerra, tells Fortun e. But we are not in normal economic circumstances.
Current tightness in the property market stems from limited housing stock, those lower rates, and the altered appetite of buyers during the pandemic, she explained: “My belief behind all this is that we have a significant impact from the Millennials who ended up buying during COVID and picking up the last of that supply that was available at really low interest rates.”
Although present reductions aren't significantly affecting mortgages, she noted, once a decrease of an additional 50bps is achieved, financial institutions might start paying attention, although “it may not be an immediate, full return to normal.”
Guerra penned the memo pointing out the widest gap in decades between the Fed funds rate and current mortgage deals, indicating the limited sway the FOMC presently holds over real estate. However, this situation might shift, she noted: “I think the spread is going to come down, it’s going to compress, meaning that the Fed will have—over time—more control. Even with tariffs we’re going to get more certainty as we close out this year of what that’s going to look like and what that could mean to term premiums.” (Trade restrictions might be why rates remain elevated as the FOMC grapples with their inflationary impacts.)
Is there a silver bullet?
Guerra contends that although the Fed influences a crucial element in the property market's operations, government policy isn't the sole determinant. Especially in a K-shaped economy, where the financial situations of affluent individuals and those with lower incomes differ significantly, it's vital to concentrate on the drivers of the actual economy.
Income inequality is an “incredibly important issue,” Guerra began, and “the have-nots in this scenario … may feel the greatest pressure.”
Federal authority is minimal regarding state and local regulations on housing hurdles, such as zoning, affordable housing mandates, building codes, and tax structures, all of which “drastically impact” where individuals can reside, according to her. “It’s important when we’re thinking about affordability to acknowledge that it’s not just the federal government… yes, they play a primary role in people’s access to leverage to getting that mortgage and to lever up to buy a home, but in order to make it affordable, it’s also what’s happening at the local level right from a zoning, tax, and policy angle,” she further stated.
Liam Bailey, global head of research at real estate consultancy Knight Frank, contends that the primary problem facing America's property market is affordability, with Gen Z and Millennials bearing the brunt of this issue, he stated. “Anyone who’s entering the market for the first time is probably most affected,”
He further states in a special interview with Coins2Day that the fundamental reasons affecting home values are beyond the Fed's control. The initial issue is the crucial down payment, with savings rates declining rapidly each time the FOMC makes a reduction. Additionally, there's a scarcity of available housing, and a third factor is the rise in family earnings over the last half-century, driven by societal changes that led to more women entering the workforce, consequently increasing household funds for price inflation.
A factor that could significantly reduce market friction is also boosting the incentive to relocate: specifically, making sure homeowners don't forfeit their advantageous 30-year low mortgage rates.
“The problem comes when you have an interest rate shock like we’ve had recently. The market just basically closes down because why would anyone move off their 3% fixed to a 7% mortgage by moving house?” Bailey explained. “They just wouldn’t, so they don’t move and then the whole thing just grinds to a halt.”