Trump blames ‘Too Late Powell’ for a housing crisis—but top analysts say low rates ‘snapped the trap shut’ on Millennial and Gen Z homeowners in the first place

Economists from JP Morgan and Morgan Stanley argue that current high mortgage rates and housing affordability challenges stem less from the Federal Reserve's recent policies and more from the legacy of ultra-low rates post-financial crisis that inflated home prices, coupled with a significant spread between policy rates and mortgage offers. Despite recent Fed cuts, mortgage rates remain stubbornly high around 6.2% as lenders largely ignore monetary policy amid tight housing supply and pandemic-era buying. While further Fed rate reductions may eventually narrow this spread, underlying structural issues, including limited housing stock and homeowners' reluctance to forfeit low fixed-rate mortgages, suggest the Fed's current influence on the property market is constrained, pointing to prolonged affordability pressures.

Analysis

The current housing market's high mortgage rates, stubbornly around 6.2%, are attributed by JP Morgan and Morgan Stanley economists to the legacy of ultra-low rates post-2008, which inflated home prices and shattered affordability. Despite 125 basis points of Fed cuts since September 2024, the spread between mortgage rates and policy rates remains over 2%, a 40-year high, indicating lenders' unresponsiveness to current monetary policy. This highlights the limited immediate impact of Fed rate adjustments on the housing sector.

Housing affordability has significantly deteriorated, with the National Association of Realtors' index dropping from 108 in 2022 to 97.4 by 2025, meaning median-income families often cannot qualify for a mortgage on a median-priced home. Key barriers include substantial deposit requirements and a tight housing supply, exacerbated by pandemic-era buying and homeowners' reluctance to move from existing low fixed-rate mortgages. These structural issues, not current Fed rates, are primary drivers of market stagnation.

While a further 50bps Fed rate reduction might eventually prompt lenders to narrow the spread, the Fed's influence over the property market is expected to remain constrained near-term. Experts suggest the spread will compress, giving the Fed more control, but acknowledge local zoning, tax policies, and income inequality are also critical factors. The market faces prolonged challenges beyond monetary policy, particularly for first-time buyers.

Key Decisions for Investors

• Investors should recognize that current housing market dynamics are driven more by structural factors and past monetary policy than by recent Fed rate cuts, implying a prolonged period of affordability challenges.
• Monitor the spread between policy rates and mortgage offers, as a significant compression (potentially after further Fed cuts) could signal a shift in lender behavior and increased Fed efficacy.
• Consider the impact of local housing policies, supply constraints, and income inequality as persistent headwinds for the residential real estate sector, particularly for entry-level segments.