The Federal Reserve is rapidly raising interest rates in order to fight inflation, announcing another sharp upward bump July 27. While no one likes inflation, Congress and the president must recognize the harm this sudden rise in rates can do in our already troubled housing market. That harm won’t be distributed equally, but there are things we can do to reduce the damage to those who will be hurt the worst.
Rising interest rates don’t affect everyone the same. If you don’t need to borrow and you collect income from interest on bank accounts, government bonds, etc. — generally people who are financially secure — you benefit from rising rates. But borrowers will pay more, and with home prices in many places already through the roof, those higher payments will cripple the ability of many to buy a home.
Nationally the rate for a 30-year fixed mortgage has nearly doubled in the past year, and that was before the Fed’s latest announcement. This will most severely affect low- and moderate-income families, who were already struggling with the cost of housing and who generally don’t have enough saved or invested to get much interest income. Low- and moderate-income Americans are disproportionately Black, Latino or Native American, as well as some underreported Asian American communities.
Higher mortgage rates mean higher monthly payments, pricing even many middle-class families out of homeownership. While this will likely depress home prices at some point, prices have risen nationally in the first half of 2022 despite rising mortgage rates.
For those who can afford to pay cash, any decline in home prices helps, but for those needing a mortgage, it will take a huge price drop to make up for those higher interest rates. And that’s unlikely. Due to rising interest rates, housing starts and permits for future building have already begun to fall, signaling a constriction in supply that will keep prices from dropping drastically.
That means millions of American families will be even more completely cut off from any opportunity for homeownership — which remains this country’s most reliable path for building financial security. Study after study shows that homeownership improves a family’s financial stability and ability to weather crises like job loss or illness, but for too many families the door has been slammed shut.
The market or government programs alone won’t fix this, but together they can help. My home state of California has already shown one path forward, with the California Dream for All program. This bold program provides homebuyers with a loan to help them make the very steep down payments that are often required — without adding to their mortgage expenses. Instead of adding to their monthly payments, this loan gets paid back when the home is sold, with the state getting a share of any profit equivalent to its initial investment.
This program should be copied nationally and in other states, but it’s not enough. We need government action to stimulate the creation of naturally affordable homes, meaning multifamily dwellings available for purchase — in addition to the ongoing need for affordable rentals.
There’s been a push in many places to change zoning rules that needlessly bar multifamily housing from too many neighborhoods — again necessary, but not sufficient. Government must directly incentivize construction of affordable, multifamily homes.
One model to consider is the federal Low-Income Housing Tax Credit, created in 1986 to fund construction of affordable rental apartments. We need a similar program targeting affordable homeownership, and we need it yesterday. Congress can do this — and call me naïve, but it seems like the sort of thing we should be able to get bipartisan agreement on.
Homeownership has long been central to the American Dream, and that dream is in trouble. For the non-wealthy, especially communities of color, the spike in interest rates will make a bad situation worse. It’s time to act.
Adam Briones is CEO of California Community Builders, based in Oakland, Calif.