Home prices are rising. Is this a problem with the Fed?

Robert Kaplan, chairman of the Federal Reserve Bank of Dallas, is watching the housing market nervously as he looks at the way forward for monetary policy. Home prices are rising at a double-digit pace this year. Zillow estimates that a home in and around the city sold for $306,031 in June of this year, up from $261,710 a year earlier.

Many of Mr. Kaplan’s colleagues harbor similar concerns. They are concerned that the housing boom could look like a bubble, threatening financial stability. And some are concerned that the central bank’s larger bond purchases could help boost it.

“It bothers me that you’ve got this initial housing bubble, with anecdotal reports backed by a lot of data,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a call with reporters on Friday. . He doesn’t think things are at a crisis stage right now, but he believes the Fed should avoid aggravating the situation. “The housing bubble in the mid-2000s caused us a lot of trouble.”

Policymakers don’t have to look far to see rising prices, as housing is getting more expensive almost everywhere. Based on Zillow estimates of local housing values, buying a typical home in Boise, Idaho, cost about $469,000 in June, up from $335,000 a year earlier. The price of a typical home in Boone, NC ranges from $269,000 to $362,000. Nationally prices have risen 15 percent over the past year, data from Zillow shows, closely tracking the S&P Corelogic Case-Shiller Index of home prices, which rose. a record 16.6 percent in the year through May.

Bidding wars are frustrating buyers. Agents are struggling to navigate the frantic competition. Nearly half of small bankers in a recent industry survey said the current state of the housing market “a serious risk“For the United States economy. Lawmakers and economic policy makers alike are hoping for things to calm down—particularly because foamy home prices can eventually spill over into rent prices, for low-income households. Deteriorating affordability as they face the end of the pandemic-era eviction moratorium and, in some cases, months of outstanding rent.

Industry experts say the surge in current home prices has emerged from a cocktail of low interest rates, rising demand and supply constraints. In short, it is a situation that many people are acutely realizing that there is no single policy flaw and there is no easy solution.

Fed officials face an especially difficult calculation when it comes to housing.

Their policies certainly help boost demand. Bond-shopping and lower Fed interest rates make mortgages cheaper, prompting people to borrow more and make bigger purchases. But rates aren’t the only factor behind the home price craze. It also traces factors beyond the control of the central bank – demographics, a pandemic-induced desire for space, and a very limited supply of new and existing homes for sale.

“Interest rates are one factor that is supporting demand, but we can’t really do much about the supply side,” Fed Chairman Jerome H. Powell explained during a recent congressional testimony.

Pulling back monetary support to try to rein in housing in particular is an unattractive prospect, as doing so would slow the overall economy, making it harder for the central bank to promote full employment. of the fed the policy-making committee voted on Wednesday to set policy on full-support mode, and Mr. Powell told a later news conference that the economy fell short of central bank jobs target.

But central bank officials also monitor financial stability, so they are looking at price increases.

Housing demand was strong in 2018 and 2019, but it really took off Earlier last year, the Fed cut interest rates to nearly zero and began buying government-backed loans to calm markets at the start of the pandemic. Mortgage rates fell, and mortgage applications increased.

This was partly the point when the Fed fought to keep the economy afloat: home-shopping fueled all kinds of spending on washing machines and drapes and kiddie pools, so it was a vital lever to lift the entire economy. Is. Stoking it helps revive shaky growth.

Those low interest rates took a hit as housing was entering a social sweet spot. Americans born in 1991, the nation’s largest group by year of birth, just turned 30. And as Millennials – the nation’s largest generation – were thinking about trading in that fifth-floor walk-up for their own home, the coronavirus lockdown took off. Hold.

Suddenly, having more space became paramount. For some, several rounds of government stimulus checks paid down payments seem more practical. For others, remote work opened the door to new home markets and possibilities.

Reina and David Pomeroy, 36 and 35, were living in a rental in Santa Clara, Calif., with their children, ages 2 and 7, when the pandemic hit. Buying at California prices seemed like a pipe dream and they wanted to be near the family, so they decided to relocate to Mr. Pomeroy’s brother in the Boulder, Colo., area.

They closed at the end of July, and they were gone in a few days. Ms. Pomeroy was able to take her job from a start-up remote, and Mr. Pomeroy is hoping that Google, her employer, will allow her to move into their Boulder office. The pair looked at between 20 and 30 homes and made six offers — over $200,000 over their original budget and over $995,000 on their new 5-bedroom — and lost, before eventually sealing the deal. .

Their experience underscores the other key issue driving up prices: “There’s not enough inventory for everyone who’s looking,” said Redfin agent Cory Keech, who helped Pomeroy find his home.

Following the housing bust in the mid-2000s, domestic supply in the residential real estate market fell, as construction slow Thanks to zoning regulations and tougher financing standards. Shortages of timber, equipment and labor have emerged ever since the pandemic took hold, making it difficult for builders to rapidly churn out units.

Chris Glynn, an economist at Zillow, said, “The rapid price appreciation we are seeing is the real-time exposure of Eikon 101.”

There are early signs that the market may be bringing itself under control. Applications for new mortgages have slowed this year, and existing home goods are on the list. something has grown. Many housing economists think the price hike should ease later this year.

And while the key moment in US housing has some echoes for the 2008 financial crisis – cheap borrowing by the Fed is enabling ambitious purchases, and Investors are jumping fast Market differences can be even more important.

Homeowners, such as Pomeroys, are more able to afford the homes they are buying than in 2005 and 2006. People who mortgage these days, they have excellent credit scores, in contrast to that earlier era.

And in the mid-2000s a big part of the problem lay on Wall Street, where banks were crumbling bundles of mortgages into complex financial structures that eventually came crashing down. Banks were holding a lot of inventive securities on their balance sheets, and their impact caused widespread pain in the financial sector, which brought lending – and thus business expansion, recruitment and spending – to a screeching halt.

Banks are much better regulated now. But that does not mean that there is no financial stability risk hidden in the current boom.

A rise in domestic prices can also help keep inflation high. The government measures inflation by capturing the costs people regularly consume – so it calculates housing expenditure in terms of rent, not house prices.

But a skyrocketing housing market is linked to rising rents: It makes it harder for people to make the leap to home ownership, which increases rental demand and drives up rents. This makes a lot of sense for inflation figures, as the housing cost associated with rent accounts for about a third of a key measure.

So what can the Fed do about any of this? Officials, including Mr. Bullard, have suggested that it makes sense for the Fed to slow down monthly purchases of Treasury loans and mortgage-backed securities, and quickly, to avoid an unnecessary boost to housing by keeping mortgages so cheap. I can come.

Discussions are ongoing about how and when the Fed will reduce its purchases, but most economists expect bond-buying to slow later this year or early next year. This should push mortgage rates higher and slow the booming market a bit.

But borrowing costs are likely to remain low by historical standards for years to come. Long-term interest rates have declined, even as the Fed is considering rolling back bond purchases, as investors become more bullish about the global growth outlook. And the Fed is unlikely to lift its policy interest rate — its more powerful tool — away from rock bottom anytime soon.

Ideally, officials want the economy to return to full employment before rates are raised, and most people don’t expect that moment to come until 2023. They are unlikely to speed up the plan to simply cool the habitat. Fed officials have said for decades that bubbles are difficult to detect in real time and that monetary policy is the wrong tool to pop them.

For now, the boom in your local housing market is probably being left to its own devices – meaning first-time home buyers may have to pay more, but they’ll also have an easier time getting it funded.

“We felt a little more comfortable paying more for the house to lock in lower interest rates,” Mr Pomeroy said, explaining that they could have compromised on the features they wanted but didn’t.

“Interest rates are very low and money is cheap,” he said. “Why don’t you?”

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