Home BusinessEconomic News Mohamed El-Erian says the Fed may have crushed both demand and supply as mortgage rates are high

Mohamed El-Erian says the Fed may have crushed both demand and supply as mortgage rates are high

by Joshua Garcia

The Federal Reserve’s monetary tightening policy has driven mortgage rates to their highest level since 2001, and there are concerns that this could have a detrimental effect on the housing market. Mohamed El-Erian, Chief Economic Advisor at Allianz, has expressed his worries, stating that the housing market may have been broken by the increase in mortgage rates.

“When you go from record-low mortgage rates to levels we haven’t seen for almost 20 years, you destroy both the demand and supply,” El-Erian said in an interview with CNBC. He believes that the high mortgage rates have dampened both housing supply and demand, with many buyers now unable to afford homes in the current market. Additionally, sellers are reluctant to let go of the cheap mortgage rates they secured during the early stages of the COVID-19 pandemic.

The average rate on a 30-year fixed home loan reached 7.23% the previous week, according to Freddie Mac. This surge in rates can be attributed to the Federal Reserve’s interest rate hikes. The federal funds rate was raised in July to the 5.25% to 5.5% range, and there is a possibility of another increase in the near future. El-Erian warns that the housing market is crucial to the economy and that the situation needs to be handled carefully.

The impact of higher mortgage rates can also be seen in the housing prices. The median home sale price increased by 1.7% year-over-year to $421,872 in July, just 2.5% behind the record high set in May of the previous year. Buyers are facing higher costs, while sellers are seeing less demand. This has led to a standstill in the market, with fewer applications for home purchase mortgages and overall uncertainty.

The Federal Reserve’s objective is to bring inflation down to 2%, with Fed Chair Jerome Powell determined to achieve this target. However, El-Erian questions whether 2% is the right target and suggests that Americans may have to live with a stable inflation rate that is higher than 2%. He also highlights the possibility of headline inflation increasing in the future.

In conclusion, the rise in mortgage rates due to the Federal Reserve’s monetary tightening policy has raised concerns about the stability of the housing market. Mohamed El-Erian warns of the negative impact on both demand and supply, with buyers unable to afford homes and sellers reluctant to let go of low mortgage rates. It is essential to carefully manage the situation as the housing market plays a crucial role in the overall economy.

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