A new paper from the Federal Reserve argues that the central bank's recent rate hikes may be increasing wealth inequality rather than reducing it.
What Happened: Federal Reserve Board economist Daniel Ringo argued that home purchases by low- and moderate-income households may be particularly sensitive to mortgage interest rates. The households budgets are tighter and more often come up with payment-to income ratio constraints in credit decisions. See also: Best Mortgage Lender Companies.
Ringo pointed out that a one percentage point policy-induced increase in mortgage rates reduces the presence of low-income households in the population of home buyers by one percentage point after the shock, as well as the effects of hiking interest rates. In the case of low and moderate-income households, the reduction is two percentage points.
The wealth-building effects of being denied or discouraged from taking a home purchase loan are particularly acute for households that do not already own their own home, according to Ringo. He said that the adjustments are apparently a slow process.
Monetary policy affects not only the value of assets, but who is able to purchase those assets, he explained. Ringo said that while low-wealth households may not experience immediate appreciation of financial assets when the stance of monetary policy is expansionary, that stance can allow them to get their foot in the door of home ownership.
The forced-savings nature of amortizing mortgage payments and house price appreciation can be a powerful wealth building tool for these families over the decades. He concluded that tighter policy seems to prevent many lower-income families from buying homes.
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