A rate cut at the next meeting in September seems inevitable at this point given the slowing down of headline inflation figures, although they are still a full percentage above target. President Trump has found a new reason to push for a cut, now blaming Fed Chair Jerome Powell for "destroying the housing market" and "hurting the housing industry very badly". The truth points toward visceral structural problems that transcend monetary policy alone. Current mortgage rates hovering around 6.5-6.75% have created an ongoing affordability crisis, with monthly mortgage payments on median-priced homes reaching $2,570, requiring an annual income of at least $126,700 to qualify. This has pushed existing home sales to their lowest level in 30 years, with home prices now representing five times the median household income, well above the traditionally affordable ratio of 3:1. The Fed's aggressive rate-hiking campaign from near-zero to 4.25-4.5% has essentially frozen the housing market, creating what economists describe as "upside-down economics", where traditional monetary policy tools may prove ineffective.
However, the promised Fed rate cuts may not provide the housing market much relief that both Trump and homebuyers hope for. Fed rate cuts primarily impact short-term interest rates, while mortgage rates are more closely tied to long-term Treasury yields, particularly the 10-year note and above, which remains inflated on federal deficits and heavy government borrowing. Moreover, over 90% of current homeowners locked in mortgage rates below 6%, creating a "golden handcuff" effect that severely constrains housing supply as homeowners refuse to trade their low-rate mortgages for higher-rate loans. The housing supply crisis approximately needed an estimated 3.8 million additional units, which cannot be solved through monetary policy alone, as rate cuts might actually worsen demand without addressing the fundamental shortage. Critical demographic variables, including baby boomer reluctance to downsize and lower immigration, could shrink the construction workforce, with one-third of construction workers being foreign-born, and proposed tariffs on construction materials adding an estimated $10,900 to new home costs, adding to the affordability challenge beyond the Fed's direct influence.
The lumber price index's recent 12% decline since early August has been called a compelling recession indicator that shows construction sector weakness, though this commodity signal reveals different dynamics than headline housing prices suggest. Lumber futures, which reached $678 per thousand board feet in early August before falling to a low of $581 by August 19th, traditionally correlate with economic cycles as construction demand directly impacts lumber consumption. This decline coincides with building permits dropping to a 29-month low, suggesting that the construction industry is already experiencing recessionary conditions even as home prices remain elevated. The lumber market's sensitivity to both supply disruptions and demand reduction makes it an effective leading indicator for broader economic health. Powell's role in housing market dysfunction seems overstretched, while the lumber price collapse is a clear indication that demand destruction may ultimately force the affordability correction that rate cuts alone cannot deliver, though this adjustment mechanism threatens to create broader economic instability as the housing sector represents approximately 15-18% of GDP through direct construction activity and related economic multiplier effects.
Sources: Reuters, Harvard, Trading Economics, Business Insider
Photos: Unsplash
