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ANALYSIS: President Trump blames Jerome Powell and the Fed over the housing slump, but economists at JPMorgan and Morgan Stanley say today’s high mortgage rates aren’t the Fed’s fault — they’re a holdover from years of extremely low interest rates after the financial crisis, which drove home prices to unaffordable levels. Despite multiple Fed cuts, mortgage rates remain higher. The spread between interest rates and mortgage offers is at its highest in 40 years as lenders largely ignore monetary policy amid tight housing supply and pandemic-era buying.
The White House is using the housing crisis as a stick to beat Fed Chairman Jerome Powell. “Can someone please let Jerome “Too Late” Powell know that he is seriously damaging the housing industry?” the president wrote for Truth Social earlier this year. “It keeps people from getting mortgages.”
Elsewhere, Trump’s housing chief called Powell a “maniac” and Treasury Secretary Scott Bessent said: “The biggest obstacle to housing is mortgage rates. If the Fed lowers mortgage rates, they can end this housing slump.”
If only it were that simple.
While the Fed controls short-term interest rates, which may affect mortgages to some extent over the long term, the market shows that lenders are rarely concerned about the actions of the Federal Open Market Committee (FOMC).
“Despite the Fed’s 125 basis points of tapering starting in September 2024, the spread between outstanding mortgage rates and new mortgage rates is more than 2%, the highest in 40 years, suggesting that further tapering of housing activity may be needed,” Morgan Stanley wrote in a note in late October, before Powell made another cut.
Despite this, mortgage rates have barely budged and are still hovering around 6.2%.
Economists say Powell’s (or his successor’s) influence on the real estate market will not return anytime soon. While the fallout from the FOMC’s tapering regime may spur spending for savers desperately stocking up on this all-important deposit, lower rates only add salt.
Fed policy can’t be blamed for the state of the housing market right now, says David Kelly, chief global strategist and head of JPMorgan Asset Management’s global market insights strategy team. The problem is the actions of the Fed in the past.
“The Fed may be to blame for its behavior in the housing market for years, but the real blame is not that they kept interest rates too high today, but that they kept interest rates too low for too long after the Great Financial Crisis,” Kelly said. Fortune in an exclusive interview.
Since 2008 until the end of 2015 At the end of 2019, the US base interest rate was effectively zero, and in 2019 rose to around 2.4% before being sharply reduced again due to the COVID pandemic. Kelly added that this was due to “abnormally low mortgage rates” for a long period of time, “which encouraged everyone to buy a house and bid.”
He explained, “The question was never how much is this house worth, but how much can you afford? With mortgage rates at 3%, people could afford a lot. When the Federal Reserve normalized interest rates, they kind of sprung a trap.”
Buying a home is becoming increasingly unaffordable for first-time buyers. in 2022 The National Association of Realtors’ Housing Affordability Index was 108 (a value of 100 means a median-income family has just enough income to pay for a mortgage on a median-priced home). Until 2025 that number dropped to 97.4, meaning the average family doesn’t have the income to qualify for a mortgage on a median-priced home.
The problem for many buyers is not necessarily paying off the debt over time; this is collecting the deposit required to secure the mortgage. While zero down payment mortgages are widely offered in markets such as the UK, in the US they tend to target buyers such as veterans and those buying in specific rural areas. For consumers who don’t qualify, that’s a big ask: One in three Americans have no emergency savings at all, with the median just $500, according to a November survey by Empower.
Under “normal” economic conditions, a lower Fed rate should translate into lower mortgage rates, said Monica Guerra, head of U.S. policy at Morgan Stanley. Fortunee. But we are not in normal economic conditions.
The current stress in the real estate market is a result of limited housing stock and lower rates that fueled buyer appetite during the pandemic, she explained: “My belief is that all of this comes down to the fact that we’re heavily influenced by millennials who ended up buying during COVID and took the last supply that was available at really low interest rates.”
Another 50 bps cut could attract lenders’ attention, although “it may not be an immediate, full return to normal,” she said.
Guerra wrote a note highlighting the decades-long gap between the Fed funds rate and current mortgage offers, showing how weak the FOMC’s influence is on the housing market. But that could change, she said: “I think the spread will narrow, it will narrow, which means the Fed will have more control over time… We’ll have more certainty as we finish this year on what that will look like and what that might mean for the term of payments.”
Guerra says that while the Fed controls the main lever of the real estate market mechanism, politics in Washington is not the only factor. There are many real-world factors beyond the Fed’s control.
In a K-shaped economy, the fortunes of the wealthy and those at the lower end of the income spectrum are vastly different. Income inequality is an “incredibly important issue,” Guerra said, and “the poor in this scenario … may feel the most pressure.”
The federal government has limited influence over state and local politics when it comes to bureaucracy, whether it’s zoning, affordable housing quotas, code issues, tax systems and so on, she said. “It’s important when we think about affordability to recognize that it’s not just the federal government … yes, they play a key role in leveraging people to get that mortgage and buy a home, but to make it affordable, it’s also happening at the local level in terms of zoning, taxes and policy,” she added.
Liam Bailey, global head of research at real estate consultancy Knight Frank, says Gen Z and Millennials are at the sharp end: “Probably the first-time entrants to hit the hardest,” he said.
The first problem is that all-important down payment, the savings rate of which declines every time the FOMC lowers interest rates. Another thing is the low supply of housing stock. The third is the rise in household incomes over the past 50 years, as more women entered the workforce and families had more money to spend on price increases, he said.
One of the factors holding people back is that homeowners don’t want to lose the 30-year low mortgage deals they got during a period when Fed interest rates were close to zero.
“The problem comes when you have an interest rate shock like we’ve had recently. The market basically shuts down because why would anyone move their 3% fixed mortgage to a 7% home loan?” Bailey explained. “They just don’t want to, so they don’t move, and then everything just stops.”
This story originally appeared on Fortune.com
