Fed official doesn’t think housing market is headed for a crash: ‘I’m trying to buy a house here in Washington and the market is crazy’

Federal Reserve Governor Christopher Waller has no doubts about the competitiveness of today’s housing market.

“Believe me, I know it’s 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 though house prices and rents have skyrocketed over the past two years, he has no fear that the housing market is about to repeat the crash that occurred in the mid-2000s and which eventually triggered the Great Recession.

His reasoning has to do with the forces contributing to skyrocketing housing costs. “My short answer is that unlike the housing bubble and crash of the mid-2000s, the recent rise appears to be supported by substantial supply and demand issues,” he said, and “not by a excessive leverage, looser underwriting standards or financial speculation”.

Waller also noted that mortgage borrowers’ balance sheets were stronger heading into the COVID-19 pandemic, meaning they were more resilient. And banks have proven able to weather the downturns in recent regulators’ stress tests.

In his speech, Waller highlighted the many forces he believes are contributing to the rising cost of housing across the country. On the demand side of the equation, many households have sought larger homes to accommodate remote work and school. There has also been an increase in household formations during the pandemic, reducing vacancy rates across the country for renter-occupied and owner-occupied housing.

“Unlike the housing bubble and crash of the mid-2000s, the recent increase appears to be supported by substantial supply and demand issues.”

— Christopher Waller, Federal Reserve Governor

These pandemic-era shifts have further amplified the demand-side issues that were driving up housing costs before the pandemic. Before COVID-19, there was a shift towards urban life as people sought high paying jobs in big cities. While the pandemic may have prompted some of these people to flock to suburbs and suburbs, it’s too early to tell whether people will return to their offices and reinvigorate demand for city living.

“Supply has pushed in the same direction — toward tighter housing markets and more expensive shelters, Waller said. Homebuilders face multiple challenges, including the rising cost of materials such as lumber. , a tight labor market and strict land use regulations have slowed the pace of housing construction, worsening the imbalance between supply and demand.

While Waller may not be concerned about the possibility of a housing bubble bursting, he signaled that the cost of housing is becoming a major concern for monetary policy.

“With housing costs taking on an ever-increasing weight in US inflation, I will be taking a closer look at real estate to judge the appropriate monetary policy stance,” Waller said. At the same time, he echoed recent research that has suggested measures such as the consumer price index likely underestimate the true extent of housing inflation.

Economists have suggested that housing inflation will only continue to rise in the coming months, given that there is usually a lag between when housing and rental costs rise and when these increases are recorded in the surveys used to produce measures of inflation.

The recent rise in interest rates, however, could change the equation. February data on new and existing home sales showed some weakness, and many economists believe rising mortgage rates will begin to limit demand for home purchases as affordability issues intensify .

On that front, Waller said he “hopes that at least some of the pandemic-specific factors driving up house prices and rents may begin to subside over the next year.”

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