An interesting problem
The median home price has risen 26% over the past year, and median rental rates have risen 5% with it. While new home mortgage applications are starting to slow -- a positive sign that the market may be cooling off -- Americans aren't off the hook yet.
Over the past year, the government added $4.9 trillion to the national debt, bringing the total to a whopping $28 trillion as of Q1 2021. Economic policies like stimulus plans can be effective in providing temporary relief, but the consequences of printing money like it's going out of style will be felt for years to come. Inflation is already over 5% and is expected to stay between 3% and 5% until the summer of 2022, but that really depends on GDP performance over the next year and a half.
Cooling down a hot market
One way to combat rising inflation is to raise rates. Raising interest rates may not sound great, but it could help alleviate a lot of the factors fueling the hot market. If it costs more to borrow, fewer people will take out loans. This will give the market a chance to rebalance its supply and demand and level out the growth in home appreciation. This, coupled with continued supply increases from new developments over time, can help the market correct itself naturally.
Low interest rates seem great for consumers, but ultimately, consumers pay for it because our dollars buy less. After the Great Recession, interest rates stayed low. For many millennials, me included, a 5% interest rate seems unimaginable, but having such low rates for such an extended period of time isn't normal.
No one likes high interest rate environments. I think it's safe to say no one wants to relive the '80s, when bank loans were charging double-digit interest rates. But we need to normalize the idea behind raising interest rates if it helps support a more balanced economy and alleviates some of the issues driving the current housing crisis. Unfortunately, the Federal Reserve is concerned about increasing rates too soon, meaning investors and homebuyers still have a way to go before the real estate market and inflation rate cools.