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Despite welcome economic indicators that house prices and other key housing costs may be at least peaking, if not falling, the housing market remains a significant pain point for American consumers. Median house prices reached a new record high in June. The sale of new single-family homes has decreased forty percent since January. The rental market is particularly hot, with asking rents increasing 23 percent nationwide as compared with 2019.

When considering the economic stresses the housing market presents, Congress, the White House, and the federal agencies will of course be tempted to use the powers they have (and some they do not) to try to give relief to American consumers. Regrettably, however, government intervention in the housing market has historically done more harm than good. Housing finance was at the center of the 2008 financial crisis that visited substantial economic stress on Americans and spurred dramatic government intervention. Yet more than a decade later, the central actors in the crisis and response – Fannie Mae, Freddie Mac, and the Federal Housing Finance Administration (FHFA) – remain essentially unchanged.

Before Congress and the administration consider further intervention in the housing market, they must first seek to do no harm.

Before That, a Note on the Fed

It is important to note that decreasing demand for housing is precisely what the Federal Reserve has set out to achieve in its battle against inflation. High prices are the most effective way to achieve this. “Shelter,” or housing, is one of the components of the Consumer Price Index (CPI) that tracks the average change over time in prices paid by consumers for a “basket” of goods. The shelter component of the CPI represents one-third of the index and has exhibited an uninterrupted rise in inflation, from 1.6 percent in January 2021 to 5.7 percent in July, with no signs yet of peaking. For the Fed to reduce overall inflation, decreasing the shelter component of the CPI is the single most effective measure to bring down prices across the whole economy, and the Fed has done this by raising the federal funds rate. This causes all other interest rates to rise, including mortgage rates. Higher mortgage rates mean higher house prices, which decrease demand. Decreased housing demand results in fewer people buying housing, or spending capital on housing-related costs, which slows the increase of the shelter component of the CPI.