Nobel prize-winning economist Joseph Stiglitz is pointing out what I have been advocating during the Federal Reserve’s tightening cycle - higher interest rates are causing housing inflation. Stiglitz is calling for a 50bp interest rate cut at the upcoming meeting and yes, it is warranted.
Stiglitz correctly points out that raising rates increases the cost to builders limiting future supply. This only hurts what is a tight housing supply and puts upward pressure on housing prices.
This is only part of the impact on housing. For the builders that do absorb the added costs of higher interest rates, they pass these costs on in the form of higher housing sales prices.
The BLS does not include housing prices in the housing inflation calculation so higher prices do not directly show up in the inflation statistics. Rather, the owners rent equivalent, which is the rate charged for rent to home renters shows up. And when there is a tight supply of housing, any increase in cost to build housing will flow through to rents needed to make a new project viable. This flow through for new construction to higher rents is where the acknowledged inflation shows up. Higher prices on their own only add to asset inflation and not part of the inflation calculations.
The Federal Reserve had to respond to the rapid increase in inflation that was driven by government policy of higher regulations and limiting future supply of oil. Though higher interest rates will not impact the direct impact of higher inflation from oil, it will bring confidence that higher inflation will be correctly addressed. This leads to lower expectations for continuation of inflation and lowers the risk of secondary and tertiary moves higher in inflation.
Now that the next presidential election is a toss up, oil prices have dropped to a risk neutral position waiting for the presidential outcome. This is a good opportunity for the Federal Reserve to aggressively lower rates. These lower rates will have a disinflationary impact on housing inflation in the short to medium term. But if oil prices spike or if growth comes roaring back, these disinflationary forces on housing prices could be negated.
by Michael Carino, Greenwich Endeavors, 9-6-24
Michael Carino, CEO of Greenwich Endeavors, is a finance specialist with over 30 years of experience. He has owned financial firms with roles including portfolio manager, trader, accountant, risk manager and treasury manager. He typically has positions that benefit from a normalized bond market, higher yields and value investments.
