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Too soon to declare victory over inflation, but not too late to attack housing costs

This week, the U.S. Department of Labor reported that the tide has decisively turned in the war against inflation. Year over year, the Consumer Price Index (CPI) rose 3%, the lowest increase in 26 months. Once again, however, housing was the largest contributor – over 70% of the increase.

While it is too soon to declare total victory over inflation, it’s not too late to attack housing costs. This is the challenge facing the Federal Open Markets Committee (FOMC) of the Federal Reserve Board of Governors (Fed). There are indications they are beginning to recognize this. According to the minutes of last month’s FOMC meeting, “some participants noted the recent moderation in housing services inflation and expected this trend to continue. However, a few participants pointed to upside risks to the outlook for housing services inflation associated with near-record low inventories of homes for sale, solid housing demand, and less-than-expected deceleration recently in measures of rents for leases signed by new tenants.”

The significant lack of housing supply, estimated at nearly 3.8 million homes, has driven prices even higher despite strong homebuilding numbers. Unfortunately, higher interest rates have softened housing starts since the Fed initiated its 500-basis point offensive against inflation. This action has successfully reversed the rise in overall CPI but increased the role of shelter in Core CPI. While the Fed has no direct control over housing production, it can impose measures that make it more challenging, and unfortunately it may do so. Banks, which would normally extend more loans for home acquisition, development, and construction of new homes, have become much more cautious since higher mortgage interest rates usually means lower demand. Although the current high demand deviates from past circumstances, if you are a chief risk officer at a bank, it is unlikely you would ignore this aspect.

Congress also needs to do more. In each of the trillion-dollar spending bills passed over the last three years, Congress has consistently failed to take action to boost housing supply. Bipartisan coalitions of housing advocates and Members of Congress have tried repeatedly to include the Affordable Housing Credit Improvement Act and the Neighborhood Homes Investment Act in must pass legislation to no avail. While the Biden administration has talked more about housing than any administration in the past four decades, when priorities had to be made, housing has always come up short, resulting in an actual deficit in federally supported housing. As a result, housers have been in the game, but have only received a participant ribbon for our efforts.

These important pieces of legislation could have been funded in the Inflation Reduction Act since they actually address the primary and most significant contributor to inflation.  Even worse, the Bipartisan Infrastructure Bill actually diverted at least $50 billion from homeowners, which could have been used for affordable housing initiatives. Instead, the bill was used to fund road repairs that are often the result of longer commutes by workers who can’t afford to live where they work.

Other regulatory policies have contributed to increased prices for the most affordable homes, as we saw when new energy standards were imposed on manufactured homes which would significantly increase their construction and transportation costs. While addressing climate change is and should be a high priority, burdening low- and moderate-income Americans with the costs for a miniscule impact on the nation’s carbon footprint is unfair. and immaterial. We can do better.

Rent has been a major driver of shelter costs, but the nationwide index of rent prices for new leases has begun to fall. We must exercise caution that new regulatory policies don’t contribute to a reduction in production, resulting in a reversal of this positive trend. Rental costs are closely related to the record high prices for first-time homeownership opportunities, as the rental market expands at a faster pace than increased supply can respond to demand.

We are experiencing a waterfall of housing unaffordability encompassing various aspects, from the lack of homes for sale to first-time homebuyers to unaffordable rental units for working people and families, ultimately contributing to the bleeding edge of the homelessness crisis. Housing is a continuum, where fewer homeownership opportunities mean more renters and higher rents. Fewer affordable rental units result in increased housing instability and ultimately more people experiencing homelessness. Unfortunately, opposition to affordable housing is broad, deep and bipartisan, as we recently saw in New York State and Arlington, Virginia. This is why I say, if you don’t want affordable housing in your backyard, you’ll end up with homeless people in your front yard.

Another area that raises great concern is recent efforts by banking prudential regulators to significantly increase capital standards in the wake of the failure of Silicon Valley Bank (SVB). No amount of stress testing or additional capital would have saved SVB. SVB had over $18 billion in liquidity infusions from the Federal Home Loan Bank of San Francisco in 2022 – it had none the year before. You can’t stress test for incompetent risk management and inadequate supervision by prudential regulators.

Instead, increased capital standards on banks could exacerbate a wide range of risks, discouraging lending activities and undercutting independent mortgage banks that are already navigating the huge decline in originations due to the rapid increase in mortgage interest rates. “An indiscriminate increase in capital charges for mid-sized and regional banks, particularly without fine-tuning for key assets in the mortgage finance sector, could exacerbate already challenging conditions in the housing and mortgage markets,” Mortgage Bankers Association president Bob Broeksmit recently wrote. Yet, bank regulators continue to press for dramatic increases in capital requirements without an adequate comment period to fully explore the many potential unintended consequences.

To effectively tackle the challenges of housing supply and affordability, it is imperative for Congress, the Biden administration, and the financial regulators to adopt an all-of-government approach that eliminates mixed messages, empty promises, and insufficient political determination. This is why a diverse coalition of housing advocates asked President Biden 16 months ago to convene a President’s Council on Housing Affordability, composed of a broad range of external stakeholders and federal officials. It’s time to get serious about fighting inflation and addressing housing affordability. Though we’ve lost valuable time and opportunities, it is not too late to take action.

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