The Federal Reserve's Impact on the Housing Market

Dan Nicholson

One of the most pressing concerns currently affecting the U.S. economy is the housing market's precarious position. Renowned economist Mohamed El-Erian has recently highlighted potential cracks in the system. As El-Erian suggests, the Federal Reserve's actions over the past year—specifically its aggressive interest rate hikes—could be the key factor causing the instability.

Fed's Actions and The Housing Landscape

In a recent conversation with CNBC, Mohamed El-Erian, Chief Economic Advisor at Allianz, shed light on the present state of the housing market. He expressed grave concerns, emphasizing that the market could be "broken," mainly due to soaring mortgage rates.

Recent data from Mortgage News Daily supports his stance. The 30-year fixed mortgage rate reached an astounding 23-year high of 7.48% last week. This sharp increase in rates has effectively stalled the housing market in its tracks over the past year. Here's how:

Impacted Demand: The higher borrowing costs have made homeownership prohibitive for many potential buyers. As mortgage rates surge, the dream of owning a home becomes distant for a larger segment of the population.

Suppressed Supply: Those who own homes, especially those who have secured their homes with low interest rates in the past, are now reluctant to sell. Their hesitancy stems from the knowledge that if they were to buy a new property, they'd be entering the market at these current elevated rates.

Consequently, while demand dwindles, the supply remains constricted, maintaining high property prices. This paradoxical situation has put the housing market in an unusual stalemate, making affordability a significant concern.

The Larger Economic Implications

El-Erian's central argument is clear: the housing market isn't just an isolated sector; it's integral to the broader economy. By inadvertently stifling both supply and demand in the housing realm, we are potentially jeopardizing the country's economic health. 

What is driving these changes? The Federal Reserve's rigorous approach to interest rate hikes.

To put it in perspective, the Fed has raised rates by a whopping 525 basis-points in an attempt to curb inflation. This has pushed short-term rates to their highest since 2001 and raised concerns about a possible recession.

El-Erian's Perspective on the Fed's Strategy

Known for his candid views on economic policies, El-Erian has been consistently critical of the Federal Reserve's monetary tightening strategies over the past year. He has previously articulated concerns about the U.S. facing an elevated risk of an economic downturn. His primary worry is that a premature interest rate cut might allow inflation expectations to run rampant, leading the economy into the treacherous waters of stagflation—a combination of stagnant growth and high inflation.

While inflation did decelerate to 3.2% in July from its peak of 9.1% the previous summer, El-Erian's caution remains pertinent. He believes there's potential for a short-term resurgence in inflation, attributed to persistent wage and services inflation. This could force the Federal Reserve into a corner, where they might have to adjust their inflation targets.


As we navigate these economic challenges, it's crucial to heed experts' warnings and understand the interconnectedness of our financial systems. Whether the housing market is truly "broken" remains to be seen, but ensuring its stability is undeniably crucial to the overall health of the U.S. economy.


Market Insider

Dan Nicholson is the author of “Rigging the Game: How to Achieve Financial Certainty, Navigate Risk and Make Money on Your Own Terms,” deemed a best-seller by USA Today and The Wall Street Journal. In addition to founding the award-winning accounting and financial consulting firm Nth Degree CPAs, Dan has created and run multiple small businesses, including Certainty U and the Certified Certainty Advisor program.

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