Federal Reserve Governor Christopher Waller has no doubts how competitive the housing market is today.
“Believe me, I know it’s really hot because I’m trying to buy a house here in Washington and the market is crazy,” Waller said in a speech at a housing conference.
But even as home prices and rents have risen over the past two years, he’s not worried that the housing market is poised to repeat the crash in the mid-2000s that eventually caused the Great Recession.
His reasoning relates to the forces that contribute to increasing housing costs. “My short answer is that, unlike the housing bubble and crash of the mid-2000s, the recent increase appears to be sustained due to fundamental supply and demand issues, not through excessive leverage, lax underwriting standards or financial speculation,” he said.
Waller also noted that mortgage borrowers’ balance sheets have been stronger in the direction of the COVID-19 pandemic, which means they have been more resilient. Banks have proven their ability to withstand deflation in recent stress tests by regulators.
In his speech, Waller outlined the many lines he believed were contributing to the rising cost of housing across the country. On the demand side of the equation, many families have sought larger homes to accommodate remote work and school. There has also been an increase in household formations over the course of the pandemic, reducing vacancy rates across the country for both renter and owner-occupied homes.
““In contrast to the housing bubble and crash in the mid-2000s, the recent increase appears to be underpinned by fundamental supply and demand issues.”“
These pandemic-era changes have amplified the demand-related issues that were driving housing costs higher before the pandemic. Prior to COVID-19, there was a shift towards urban life, as people sought high paying jobs in major cities. While the pandemic may have prompted some of these people to flock to the suburbs and suburbs, it is too early to tell if people will return to their offices and revitalize demand for city living.
“The supply side has been pushing in the same direction – towards tighter housing markets and more expensive shelter,” Waller said. “Home builders face many challenges, including the rising cost of materials such as lumber, a tight labor market, and stricter land-use regulations. This has led to Slow down the pace of housing construction, exacerbating the imbalance between supply and demand.
Although Waller may not be worried about the possibility of the housing bubble bursting, he noted that the cost of housing is becoming a bigger concern for monetary policy.
“With housing costs gaining more weight than ever in Americans’ experience of inflation, I will be looking more closely at real estate to judge the appropriate stance for monetary policy,” Waller said. At the same time, he echo recent research This suggests that measures such as the Consumer Price Index are likely to underestimate the true extent of housing inflation.
Economists have suggested that housing inflation will only continue to grow in the coming months, given that there is a gap between when housing costs and rents rise and these increases being recorded in surveys that are used to produce inflation measures.
The The recent rise in interest rates It could change the equation, though. February data on new and existing home sales showed some weakness, and many economists believe mortgage rates are higher It will begin to restrict the demand for the purchase of the house With the escalation of affordability challenges.
On that front, Waller said he’s “hopeful that at least some of the pandemic-specific factors driving up home prices and rents will start to fall in the next year or so.”
