Recent inflation can be blamed on government spending


Brenda P. Wenning

For door-to-door salespeople, life has never been better. But for buyers, panic could set in, as house prices jumped at an annual rate of 23.4% in June, according to the National Association of Realtors.

With the demand for housing far outstripping supply, bidding wars have become commonplace. Buyers sometimes pay six figures on the asking price and forgo inspections. Homes sell almost as fast as they are listed, and some buyers are bidding on homes they have never seen in person.

Low-income Americans in need of housing probably find the American dream of homeownership more elusive than ever.

The St. Louis Fed found that the median selling price of a home rose from $ 322,600 in the second quarter of 2020 to $ 374,900 a year later, an increase of 16.2%. In Massachusetts, which has the third highest home price in the country, an average home sells for $ 439,541.

Housing is becoming unaffordable for a growing number of Americans. Yet the federal government, which devotes enormous resources to providing Americans with affordable housing, deserves much of the blame. State and local governments are also complicit.

The great recession

The Federal Reserve is particularly complicit. Before the Great Recession of 2008-09, the Fed lowered interest rates to near zero, causing house prices to rise.

“In the face of the dot-com bubble burst, a series of corporate accounting scandals and the September 11 attacks, the Federal Reserve lowered the federal funds rate from 6.5% in May 2000 to 1% in June 2003, “according to Investopedia. “The goal was to jumpstart the economy by making money available to businesses and consumers at competitive rates. The result has been an upward spiral in house prices, with borrowers taking advantage of low mortgage rates. “

The bursting of the housing bubble that led to the Great Recession exposed flaws in the federal government’s housing programs.

As lenders relaxed underwriting standards to the point that virtually anyone could get a mortgage, it shouldn’t have been surprising that house prices jumped and billions of dollars in mortgages hit the market. scrap status. With homeowners with mortgages they couldn’t afford, foreclosures have skyrocketed, house prices have plummeted, and home builders have stopped building. In some cases, housing was “underwater,” with mortgage balances greater than home values.

Subprime mortgages were typically grouped into “tranches” and sold to Fannie Mae or Freddie Mac. When the mortgages turned out to be virtually worthless, Fannie and Freddie were forced into “custody.”

In response, the Federal Reserve began buying billions of dollars in bonds to lower interest rates to near zero, in part to stabilize the housing market.

High demand, low supply

For three years under the Trump administration, the Fed raised interest rates slightly. But it changed direction when the pandemic and the lockdown that came with it hit, resuming its zero interest rate policy.

If you live in a fantasy world, lowering interest rates will make housing more affordable. But in the real world, lower rates increase demand, which in turn increases prices.

Demand is also driven by the 72.1 million Millennials who have reached the home buying age. Having recently supplanted the Baby Boomers as the largest population group, Millennials are starting families and causing increased demand.

Demand has also been driven by the pandemic. Confined city dwellers sought more breathing space by moving to suburbs or to states like Florida, which was libertarian with its lockdown from authoritarian New York and California. Many still work from home and wish to live in the suburbs rather than in crowded cities.

Demand is stimulated at a time when supply is low. During and after the financial crisis, home builders stopped building. Those who have tried in many cases have met resistance from local councils. Many communities have restrictive zoning laws to control traffic, avoid straining their school systems, and for other reasons.

The housing stock declined during the Great Recession and remained low even when the pandemic hit and kept the housing stock even lower. Shortages of labor and affordable materials have also affected house prices. The price of wood, for example, has skyrocketed during the pandemic. Currently, stocks are down more than 38% year over year and are at historic lows, according to The Balance.

“A recent Jefferies banknote indicated that the United States was short of 2.5 million homes,” BusinessInsider reported, “while Freddie Mac put the higher estimate at a shortfall of 3.8 million. There are 40% fewer homes on the market than last year, according to a report from Black Knight.

Inflation at all levels

Meanwhile, inflation has accelerated. When Americans have to pay more for food, clothing, energy, and other purchases, it becomes more difficult to save money for housing.

Tenants are also in a hurry, as rents have gone up. Today, more than half of renter households are “rent-burdened”, which means that more than 30% of their income is needed to pay their rent. Worse still, 26% of households spend more than half of their income on rent.

While the Fed says inflation is “transient” and blames it on supply chain issues, it continues even though the economy is above its pre-pandemic level. And while the Fed continues to buy $ 120 billion in bonds each month, the Biden administration continues to spend as if the pandemic has just started.

“With the end of the recession and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy by pursuing an emergency level of easing quantitative (QE) with asset purchases of $ 120 billion per month of Treasuries and Mortgage Backed Securities, ”wrote US Senator Joe Manchin, DW.Va., to Fed Chairman Jerome Powell. “The record amount of stimulus in the economy has led to the strongest inflation momentum in 30 years, and our economy hasn’t even fully reopened yet.”

Despite this, the Wall Street Journal reported that until recently, Manchin supported the Biden administration’s $ 1.2 trillion infrastructure bill, as well as up to $ 3.5 trillion in new spending for the resolution. Senator Bernie Sanders’ budget.

The new spending is in addition to the $ 4.6 trillion allocated to COVID-19 relief programs, of which $ 3.6 trillion has been spent or is committed to be spent.

So here we are as the pandemic continues to escalate, with the government looking to spend an additional $ 4.7 trillion, even though it has not fully spent $ 4.6 trillion previously allocated to COVID-related spending.

“Monetary policy is stimulating the economy more aggressively than at any time since the Great Depression,” economist Stephen Miran wrote in the Wall Street Journal. Households also have over $ 2.5 trillion in excess savings that they are starting to spend, unemployment benefits have pushed up wage demands on new hires and the economy is still fueled by the grossly excessive law. of the US bailout, adopted this spring. “

Inflation is also driven by the cost of doing business, which increases as Congress passes new regulations. The proposed infrastructure legislation includes, Miran wrote, “a mandate for new cars to have breathalyzer and eye tracking technology to prevent drunk driving, climate technology to prevent children from being drunk. accidentally left in vehicles in hot weather, a safety technology for automatic emergency braking. and collision avoidance systems, lane departure warnings and corrections, specialized rear protection on certain types of vehicles, automatic stop systems, etc.

The Biden administration is also expected to reverse much of the deregulation that has taken place over the past four years.

The Fed’s inflation rate, which excludes food and energy, was 6.1% for the second quarter. It is likely to go even higher, as a survey by the Institute for Supply Management found that 66.7% of service companies raise prices and less than 1% reduce them.

Higher inflation will continue to push up the price of homeownership, but housing isn’t the only thing many Americans won’t be able to afford.

Brenda P. Wenning is President of Wenning Investments, LLC of Newton. She can be reached at [email protected] or 617-965-0680. For more information, visit his blog at

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