Why the Fed's Rate Playbook Might Be the Wrong Tool for This Housing Market

I've spent over four decades watching interest rates move Bay Area real estate, and I've never seen a stretch quite like the one we're in right now. The Fed has held the federal funds rate at 3.50 to 3.75 percent through four straight meetings, and depending on who you ask, the next move could just as easily be a hike as a hold. Inflation is still running above the Fed's 2 percent target, and a good chunk of that is tied to energy prices and supply disruptions connected to the conflict in the Middle East. Sound familiar? It should. We saw a version of this same story play out after Russia's invasion of Ukraine, when energy and food prices spiked and the Fed responded the only way it really knows how, by raising rates.

Here in the East Bay and South Bay, that response has real consequences that show up on the ground, not just in economic reports. When the Fed raises rates to fight inflation that's coming from a war or a supply shock rather than an overheated economy, it isn't really targeting the source of the problem. It's leaning on the one lever it has, borrowing costs, and hoping that slowing everything down eventually cools prices. For families in Danville, San Ramon, and Walnut Creek looking to move up into a bigger home, or sellers in Concord and Pleasant Hill sitting on a rate they locked in years ago, that blunt approach has a very specific effect. It keeps mortgage rates elevated even when the underlying inflation has little to do with housing demand at all.

I hear this from buyers and sellers across Fremont, San Jose, Santa Clara, and Sunnyvale on a weekly basis. Buyers are stretched thin by monthly payments that would have looked unthinkable a few years ago. Sellers who refinanced or purchased when rates were near record lows are reluctant to give that up, even when their home no longer fits their life. That mismatch is what economists sometimes call the lock in effect, and it isn't an abstract concept out here. It's the reason so many South Bay townhomes and East Bay single family homes simply aren't hitting the market, even in neighborhoods where demand from buyers has never gone away.

This is where economist Isabella Weber's research feels especially relevant to what I'm seeing in our local market. Weber has argued for years that raising interest rates in response to war driven or supply driven inflation is often the wrong tool, because it pushes down the whole economy to fight a problem that rate hikes were never well suited to solve in the first place. She made this case around the pandemic and the war in Ukraine, pointing out that broad rate increases punish employment, investment, and yes, housing mobility, without actually addressing the root cause of the price spikes. Her point wasn't that inflation should be ignored. It was that a more targeted response could ease the pressure without locking an entire generation of homeowners in place.

Weber's critique lands differently when you're watching it play out in your own backyard. Across the East Bay and South Bay, inventory has been sitting artificially low, not because people don't want to move, but because the cost of moving, in the form of a new mortgage rate, has kept them from listing. If her argument holds, and rate hikes tied to geopolitical shocks keep coming without a more surgical approach to inflation, we may be looking at continued thin inventory in Danville, San Ramon, Walnut Creek, Fremont, and Santa Clara for a while longer. That's not a comfortable outlook for buyers hoping for more choices, but it's an honest one, and it's worth understanding the forces behind it rather than just the headline rate itself.

If you're weighing whether now is the right time to buy or sell in this environment, I'm always happy to talk through what it actually looks like for your specific situation and neighborhood.