Americans Increasingly Priced Out of Buying Homes, Thanks to the Federal Reserve’s Manipulation of Mortgage and Housing Markets

The unaffordability of houses for many American households is a key problem in both politics and economics. How did American house prices get so high? A central culprit is the Federal Reserve’s vast manipulation of the mortgage and housing markets.Between the founding of the Fed in 1913 and 2008, the amount of mortgage assets on the Fed’s balance sheet was exactly zero. The amount of mortgage assets the Fed should in principle own is zero. The classic Fed knew that its money-printing monopoly should not be used to subsidize or finance any particular economic sector, including housing.Yet under the pressure of the deflating housing bubble in 2008, under the leadership of Chairman Ben Bernanke, the Fed started the unprecedented gamble of buying mortgage assets. These were primarily mortgage-backed securities issued by Fannie Mae and Freddie Mac. As part of this program the Fed, knowing that its MBS investments might result in losses, unilaterally changed its accounting presentation to hide the reduction in its capital that losses, which did indeed ensue, would cause. The goal was to drive down the interest rates on mortgages and pump up the price of houses. The Fed promised that this was a purely temporary, emergency program which would be reversed when the crisis was over. This promise was not kept. It is now 18 years since the Fed’s MBS buying started, 17 years since the financial panic ended in 2009, and 14 years since American house prices bottomed in 2012. The Fed kept buying MBS, suppressing mortgage interest rates to abnormally low levels and thereby inflating house prices, until March 2022, when its MBS portfolio reached $2.7 trillion. That alone was three times what the total assets of the Fed were at the end of 2007. Today the Fed still owns MBS of $1.9 trillion.As central to understanding American housing policy, we must remember that the housing finance system has collapsed twice in living memory — once in the 1980s and again in the 2000s. It has also produced two housing price bubbles in the first quarter of the 21st century. The first peaked in 2006, and ended with the financial crisis of 2007-2009. We are still in the late stages of the second, with home price deflation looming ahead.America’s double house-price bubble is remarkable. National average house prices now are far above the peak of the first bubble. The S&P Cotality Case-Shiller National House Price Index hit its previous peak in mid-2006 at 184.6. In mid-2026, it has climbed to 336.7— 82 percent higher than the top of the first bubble.If we adjust for the accumulated rise in the Consumer Price Index over these two decades, house prices are now 10 percent above the previous bubble peak in real terms. One informed estimate is that they are now about 30 percent higher than their long-term trend.We can principally thank the Federal Reserve for these exaggerated house prices, brought on by its artificial suppression of 30-year mortgage interest rates to less than 3 percent, enforced by its buying that portfolio of $2.7 trillion of MBS with newly-printed money. When the Fed was still buying in 2022, it was long after house prices were obviously in a runaway asset price inflation. It was at the time and remains very hard to understand this behavior of the Fed.Once mortgage interest rates went back to their historically normal levels of 5 percent to 7 percent, the Fed had rendered the inflated prices of houses unaffordable for many Americans. This experience demonstrates yet again how misguided is the idea that the Fed should be “independent” of the legislature, and how necessary it is for Congress to establish effective accountability for it.The median price for existing home sales in July 2026 was $431,400, according to the National Association of Realtors. To add some historical interest, here is an advertisement for a ranch house from 1955 that we now find hard to believe: “3 BEDROOMS, ONE BATH, SCREENED PORCH: TOTAL PRICE $7,900. Monthly payments including principal, interest, taxes and insurance, $49.74.”Of course we are not going back there, but I believe an unavoidable result of the Fed-induced second house price bubble of this century is that house prices will again fall on a national basis. National house price indexes are now falling in inflation-adjusted terms by about 2 percent per year and in many places average prices are dropping in nominal dollar terms. National average prices for newly-built houses are down 14 percent from their peak in 2022.Though not without pain for some who bought at the top, the arrival of falling house prices will improve affordability for home buyers in general.

Americans Increasingly Priced Out of Buying Homes, Thanks to the Federal Reserve’s Manipulation of Mortgage and Housing Markets

Americans Increasingly Priced Out of Buying Homes, Thanks to the Federal Reserve’s Manipulation of Mortgage and Housing Markets

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