House prices are skyrocketing. Is it a Fed issue?

Federal Reserve Bank of Dallas Governor Robert S. Kaplan is nervous about the housing market while pondering the future course of monetary policy. House prices are rising at a double-digit pace this year. Zillow estimates that a typical home in and around what he calls his home sold for $ 306,031 in June of this year, up from $ 261,710 the previous year.

Some of Kaplan’s colleagues have similar concerns. They are worried that the housing boom will look like a bubble that threatens financial stability. And some worries that the central bank’s large-scale bond purchases may be helping to inflate it.

“We are worried that this early housing bubble has occurred and the case reports are backed by a lot of data,” St. Louis Federal Reserve Bank of St. Louis Governor James Bullard said in a meeting with reporters on Friday. Stated. .. He doesn’t think things are still at a critical level, but he believes the Fed should avoid making things worse. “I suffered from a housing bubble in the mid-2000s.”

Houses are becoming more expensive almost everywhere, so policy makers don’t have to look far to see rising prices. Buying a typical home in Boise, Idaho costs about $ 469,000 in June, up from $ 335,000 a year ago, based on Zillow’s local home price quote. A typical home in Boon, North Carolina is worth $ 269,000 to $ 362,000. According to Zillow data, prices have risen 15% nationwide over the past year, consistent with the hottest home price S & P CoreLogic Case-Shiller Index. record 16.6% in the year to May.

The bidding war is frustrating buyers. Agents are having a hard time navigating the desperate competition. According to a recent industry survey, about half of small bankers are in the housing market.Serious riskTo the US economy. Lawmakers and economic policy makers alike want things to settle down. In particular, as we face the end of the pandemic era, bubbling home prices can eventually spill over into rent and exacerbate affordability for low-income households. Evacuation Moratorium And in some cases, you have to pay months of rent.

According to industry experts, the current home price boom stems from low interest rates, a fast-growing supply and demand bottleneck cocktail. In short, it’s a situation where many are keenly aware that there is no single policy or easy solution to take responsibility for.

When it comes to housing, Fed officials are facing particularly difficult calculations.

Their policies will definitely help drive demand. Bond purchases and the Fed’s low interest rates make mortgages cheaper and encourage people to borrow more and buy bigger. But prices aren’t the only factor behind soaring home prices. It also goes back to demographics, the pandemic-accelerated desire for space, and the very limited supply of new and existing homes for sale — factors beyond the control of the central bank.

“Interest rates are one of the factors driving demand, but we can’t really do much on the supply side,” Fed Chair Jerome H. Powell explained in a recent parliamentary testimony. ..

Withdrawing financial support, especially to curb housing, is unattractive, as it slows the economy as a whole and makes it difficult for central banks to promote full employment.Federal Reserve Board Policy-making committee votes Powell said in a subsequent press conference that the economy had not yet reached the central bank’s employment goals, as it continued to put the policy in full support mode on Wednesday.

However, central bank officials are also monitoring financial stability, so they are watching closely for rising prices.

Housing demand was strong in 2018 and 2019, It really took off Earlier last year, after the Fed cut interest rates to near zero and began buying government-backed debt to calm the market at the start of the pandemic. Mortgage rates have fallen and mortgage applications have skyrocketed.

That was partly the point when the Federal Reserve Board fought to lift the economy. Home buying is an important way to boost the economy as a whole, as it boosts spending of all kinds, including washing machines, drapes and children’s pools. Stalking it helps to revive terrible growth.

These low interest rates hit the house just as it entered the sweet spot of society. Born in 1991, Americans were the largest group in the country by the year of birth, just 30 years old. And when the millennials, the largest generation in the United States, began thinking about exchanging walk-ups on the fifth floor for their homes, the coronavirus blockade took place. Owned.

Suddenly, having more space became paramount. For some, several checks of down-paid government stimulus seem more feasible. For others, working from home has opened the door to new domestic markets and possibilities.

Reina and David Pomeroy, 36 and 35, lived in a rental home in Santa Clara, California, with children aged 2 and 7 when the pandemic broke out. Buying at a California price was a dream and I wanted to live near my family, so I decided to move near Pomeroy’s brother in Boulder, Colorado.

They close in late July and move in a few days. Pomeroy was able to take on the job with the startup remote control. Pomeroy wants his employer, Google, to allow him to move to his boulder office. The pair looked at 20 to 30 homes and made six offers before the final deal was closed, surpassing the original budget and $ 200,000 above the $ 995,000 offer for the new five-bedroom.

Their experience highlights other important issues that push up prices. “We don’t have enough stock for everyone looking for it,” said Corey Keach, a Redfin agent who helped Pomeroy find a home.

After the collapse of housing in the mid-2000s, housing supply declined across the residential real estate market. Construction has fallen Thanks also to zoning regulations and strict funding standards. Since the pandemic, there has been a shortage of timber, appliances and labor, making it difficult for builders to cancel units fast enough.

Chris Glynn, Zillow’s economist, said:

There are early signs that the market may put itself under control.New mortgage applications slowed this year, leaving existing home inventories Slightly rising.. Many housing economists believe that price increases should ease later this year.

And while the fierce moments of American housing have had some repercussions in preparation for the 2008 financial crisis, the Fed’s cheaper borrowing has enabled ambitious purchases, Investors are jumping in more and more Market — Differences may be even more important.

Homeowners like Pomeroy could afford to buy a home more than they did when they returned in 2005 and 2006. For those who recently borrow a mortgage, Have a good credit score, Unlike its early days.

And most of the problems in the mid-2000s were on Wall Street, where banks diced a bunch of mortgages into complex financial structures, but eventually collapsed. Banks hold many of these creative securities on their balance sheets, and their bankruptcy has caused widespread pain in the financial sector, disrupting lending and thus business expansion, employment and spending.

Banks are now much more regulated. But that doesn’t mean that financial stability risks aren’t hidden in the current boom.

Rising house prices can also help keep inflation high. Government measures inflation by understanding the cost of what people are consuming on a regular basis. Therefore, home prices are counted in terms of rent, not home prices.

However, the surge in the housing market is associated with rising rents. It makes it difficult for people to leap into their own homes, which increases demand for rent and boosts rent. This is very important for inflation data, as rent-related housing costs account for about one-third of one key indicator.

So what can the Fed do about this? Officials, including Mr. Bullard, said the Fed would quickly and quickly purchase monthly Treasury debt and mortgage-backed securities to avoid giving housing unnecessary boosts by keeping mortgages very cheap. Suggested that it might make sense to delay.

While discussions are ongoing on when and how the Fed will curtail buying, most economists expect bond buying to slow later this year or early next year. It should raise mortgage rates higher and slow down the booming market a bit.

However, borrowing costs may remain low by historical standards for the next few years. Long-term interest rates are declining, even though the Fed is considering dialing back bond purchases as investors are becoming more moody about global growth prospects. And it’s unlikely that the Fed will soon raise the policy rate (a more powerful tool) from the bottom.

Ideally, authorities want the economy to return to full employment before raising interest rates, and most people do not expect that moment to come until 2023. They are unlikely to speed up their plans just to cool their homes. For decades, the Federal Reserve Board has argued that finding bubbles in real time has been difficult and monetary policy is the wrong tool for popping bubbles.

For now, the local housing market boom will probably be left to its own device. This means that first-time homebuyers will pay more, but they will also find it easier to raise money.

“I felt a little more comfortable paying more for the house to fix it at low interest rates,” Pomeroy said, explaining that they might have compromised on the equipment they wanted, but they didn’t.

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

House prices are skyrocketing. Is it a Fed issue?

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