Federal Reserve Governor Christopher Waller is in no doubt about how competitive the housing market is today.
“Trust me, I know it’s red 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 skyrocketed in the past two years, he’s not worried that the housing market is poised to repeat the crash that occurred in the mid-2000s and ultimately triggered the Great Recession.
His reasoning has to do with the forces that are contributing to rising housing costs. “My short answer is that, unlike the housing bubble and crash of the mid-2000s, the recent rise appears to be underpinned by substantive supply and demand issues,” he said, and “not by excessive leverage, investment standards, more flexible subscription or financial speculation”.
Waller also noted that mortgage borrowers’ balance sheets were stronger before the COVID-19 pandemic, meaning they were more resilient. And banks have proven capable of withstanding recessions in recent stress tests by regulators.
In his speech, Waller outlined the many forces he believes are contributing to rising housing costs across the country. On the demand side of the equation, many households sought larger homes to accommodate remote work and school. There has also been an increase in household formation over the course of the pandemic, which has reduced vacancy rates across the country for both renter- and owner-occupied housing.
““Unlike the housing bubble and crash of the mid-2000s, the recent surge appears to be underpinned by substantive supply and demand issues.””
Those pandemic-era changes further magnified the demand-related problems that were driving up housing costs before the pandemic. Before COVID-19, there was a shift towards urban life as people sought well-paying jobs in major cities. While the pandemic may have driven some of these people to flock to the suburbs and suburbs, it’s too early to tell whether people will return to their offices and reinvigorate demand for city life.
“The supply side has been pushing in the same direction: toward tighter housing markets and more expensive homes,” Waller said. Home builders face multiple challenges, including the rising cost of materials like lumber, a tight job market, and strict regulations on land use. These have slowed down the pace of housing construction, worsening the imbalance between supply and demand.
Although Waller may not be worried about the possibility of a housing bubble bursting, he did point out that the cost of housing is becoming a bigger concern for monetary policy.
“With housing costs gaining an increasing weight in the inflation Americans experience, I will look even more closely at real estate to judge the appropriate stance of monetary policy,” Waller said. At the same time, he echoed recent research that has suggested that measures like the consumer price index likely underestimate the true scale of home inflation.
Economists have suggested that housing inflation will only continue to rise in the coming months, given that there is typically a lag between rising housing and rent costs and when those increases are recorded in surveys that are reported. used to produce measures of inflation.
the recent increase in interest rates However, it could change the equation. February data on existing and new home sales showed some weakness, and many economists believe higher mortgage rates will begin to limit the demand for home purchase as affordability challenges mount.
On that front, Waller said he was “hopeful that at least some of the pandemic-specific factors driving up home prices and rents may start to decline in the next year or so.”