5 charts that show how the Fed's war on inflation has frozen the housing market

• The Federal Reserve aggressively raised interest rates during the pandemic to cool inflation.
• But the rate hikes caused some mortgage lenders to raise their rates, as well.
• This has kept housing costs high while supply remains strained.

The Federal Reserve's aggressive inflation-fighting tactics have helped the country recover from the pandemic — but they've also put financial strains on Americans' housing budgets.

To combat high inflation, the Fed began raising interest rates in March 2022 with the idea that doing so would eventually lower prices and bring Americans some financial relief. And the central bank's war on inflation appeared to work — in September 2023, the Federal Open Market Committee announced a pause on interest rate increases as inflation continued to decline.

Since then, the central bank has continued to hold interest rates steady, with Fed Chair Jerome Powell emphasizing that while a rate cut could come this year, he does not want to risk easing off too soon which could lead to a resurgence of inflation and possibly warrant further tightening later on.

Inflation is still above the bank's 2% target — and the housing market is feeling the squeeze. The Fed's decisions do not directly set mortgage rates, but lenders have responded to the Fed's rate hikes during the pandemic by raising their own rates.

This has caused the housing market to slow as prices remained high — according to Redfin, just 15.5% of homes were considered affordable in 2023. A recent report from Harvard's Joint Center for Housing Studies found the supply of homes for rent between $600 and $799 dropped from 9 million units in 2012 to 5.8 million units a decade later in 2022, while homes for rent for at least $2,000 a month more than doubled.

Powell told the Senate Banking Committee earlier in March that even as "rates normalize" later in the year, there will still likely be a housing supply shortage.

"You have a shortage of homes available for sale because many people are living in homes with a very low rate mortgage that they can't afford to refinance, so they're not moving, which means the supply of regular existing homes that are for sale is historically low and very low transaction rate," Powell said. "That actually pushes up prices of other existing homes, and also of new homes, because there's just not enough supply."

Still, some Democratic lawmakers have pushed Powell to cut rates and give homeowners relief sooner rather than later. In January, Sens. Elizabeth Warren John Hickenlooper, Jacky Rosen, and Sheldon Whitehouse sent a letter to Powell saying that the Fed's rate hikes have kept mortgage costs high, which means "higher mortgage rates for landlords, who may pass off these costs in the form of rent hikes for their tenants."

Mark Hamrick, senior economic analyst for Bankrate, also emphasized the "indirect" relationship the Fed and the housing market have — but he noted rate cuts will still prompt "some downward pressure on mortgage rates."

"And that would be very beneficial because housing affordability is a tough hill to climb right now," Hamrick told Business Insider. "We just did a survey at Bankrate where a majority of prospective homeowners cited affordability issues as essentially standing in the way of them making a down payment, paying closing costs. And that's a direct result of consistent rise in home prices and the high level of mortgage rates."

Here's how the Fed's war on inflation has impacted the housing market and kept prices high.

30-year fixed-rate mortgage is still very high

As Business Insider wrote in a post on mortgages: "Mortgage rates aren't directly linked to the federal funds rate, but they're often pushed up or down based on how investors expect Fed moves to impact the broader economy."

This chart shows the 30-year fixed-rate mortgage is below the high rates seen in fall 2023 but remains higher than rates seen before the pandemic. This rate averaged 6.74% recently, per a Freddie Mac press release.

"Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation," Sam Khater, Freddie Mac's chief economist, said. "In this environment, there is a good possibility that rates will stay higher for a longer period of time."

Home prices have increased

This inflation-adjusted Case-Shiller home price index peaked in May 2022 at 112.9. While this figure then cooled down, it had generally been increasing during last year.

Single-family existing home sales plunged

Existing single-family home sales data from the National Association of Realtors show these sales are way down compared to before the pandemic. Even during the pandemic, sales were high after a plunge in early 2020.

There was a pretty massive rise in February though, suggesting the worst may be over.

"Single-family home sales grew to a seasonally adjusted annual rate of 3.97 million in February, up 10.3% from 3.6 million in January but down 2.7% from the previous year," a news release from NAR said.

And Hannah Jones, senior economic research analyst for Realtor.com, previously told Business Insider that "buyers are seeing less home inventory, less homes for sale in the market, and sellers are less incentivized to sell in today's market."

Single-family new home sales aren't that high

For new homes, January sales for single-family homes per the Census Bureau and the Department of Housing and Urban Development shows the seasonally adjusted annual rate is higher than a year ago.

Rob Bowman, president of home builder Charter Homes & Neighborhoods previously told MarketWatch that new home sales have increased because "there's still a tremendous need for housing in the U.S. We're seeing demand across the board."

Single-family housing starts have improved but are still below pandemic-era highs

Single-family housing starts may not be that high compared to their pandemic-era peak, but the seasonally adjusted annual rate was over 1 million this past February. Still, there could be a need for more housing starts given household formations and the ongoing housing crisis.

"If only single-family homes are considered, the rate of housing starts would need to triple to keep up with demand and close the existing 7.2 million home gap in 4 to 5 years," a recent Realtor.com report stated.

But that could be hard for builders to accomplish in just those couple of years.

"It will require sustained new construction activity, and it's likely that it will continue to be an issue for the years to come because it's just not likely that new construction activity is going to pick up to that level," Jones said.