You’ve probably heard the lament that a farmer has locked the barn door after the horse has already left the barn. That’s how the affordable housing community looks at the Federal Reserve’s decision to finally increase lending rates.
The Fed should have done this years ago. Suppressing interest rates contributed more than any other factor to making starter homes unaffordable to working families in the lower-income categories. This is not as simple as it seems, so allow me a moment to explain.
The Federal Reserve Board controls the nation’s money supply. Investors who are looking to make money on the money they have are chasing opportunities with the most significant potential for gain. The Fed was guided by a belief that growth in the investment community would trickle down into other areas of the economy, but no such trickling occurred. Not even a drop.
Treasury Bonds, which investors could buy as a “safe” investment – were actually worth less than the original investment because of inflation. The stock market — aside from an unsustainable lift in 2021 — was too volatile. But housing was a cinch of an investment for those with money.
There is a shortage of housing across the country. In many areas — such as Ventura County — there was a shortage of homes being permitted, and even those that were permitted were not being built. There was a shortage of construction workers — people who had worked in that industry suffered through the Great Recession and found jobs in other sectors. With few permits and fewer workers, factories, and mills that make housing material began to slow down or even shut down.
The United States built less than half of the housing it needed to build between 2012 and 2022, according to Realtor.com and the National Coalition of Low Income Housing Coalition.
Investors looking for a chance to make a killing honed in on buying housing — in a market where supply was short, and demand was high. To use that old cliché, this was “the perfect storm.”
Homeowners wanting to buy a “move up” house had built some equity in their homes. Interest rates were low. They wanted to buy larger homes. They went to market — placing their homes for sale — only to find that the move-up home they wanted to buy was a hot commodity. It was selling for 10%, 20%, or in some cases, 50% over the asking price. Why? Supply and demand. The move-up homeowner was competing with others who wanted to move up and the investors who were frequently able to make all-cash offers. The seller was gleeful.
The few move-up home buyers who were able to purchase the bigger home then sold their “starter” homes. But not to families looking for starter homes. Many of them sold to investors as well.
The groups hurt the most by this frenzy were people of color. By one estimate, investors bought 30% of the homes for sale in Black or Latino neighborhoods. These homes are now being rented to those who originally lived in those neighborhoods, who may never build enough equity to buy their first home.
The private equity community that invested in these homes is thrilled. Their returns on housing are extravagant. And the only reason they went into the housing market is because the Federal Reserve pushed them there.
The Federal Reserve should have been raising interest rates 7 to 8 years ago. It would have prevented a bad housing shortage from getting worse.
Now that the Fed has raised interest rates and announced there would be more, we face the real possibility of a housing bubble like 2008 when the mortgage exceeded the home’s value. And who will be hurt by such a bubble bursting? Certainly not the investors who paid cash for the homes.
Community leaders can do little to influence the policy of the Federal Reserve. And to go back to our original analogy, this horse has left the barn and is far down the road.
All we can do now is make it easier to build starter homes. Invest in areas where dormant or previously unusable properties can be turned into affordable housing. Loosen restrictions on additional dwelling units. We have a serious shortage of housing, and families are being forced to move out of the place they’ve always called home. We must create more affordable homeownership opportunities for working families in Ventura County before astronomical rentals are the only housing option left.
Darcy Taylor is CEO of Habitat for Humanity Ventura County.