Federal Reserve Governor Christopher Waller has no doubt about how competitive today’s housing market is.
“Trust me, I know it is red hot because I am 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 and rental prices have soared over the past couple years, he is not concerned that the housing market is poised for a repeat of 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 the run-up in housing costs. “My short answer is that unlike the housing bubble and crash of mid 2000s, the recent increase seems to be sustained by the substantive supply and demand issues,” he said, and “not by 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 proved capable of withstanding downturns in recent stress tests from regulators.
In his speech, Waller outlined 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 sought out 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.
“‘Unlike the housing bubble and crash of mid 2000s, the recent increase seems to be sustained by the substantive supply and demand issues.’”
Those pandemic-era changes further magnified the demand-related issues that were pushing housing costs higher before the pandemic. Prior to COVID-19, there was a shift toward urban living, 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 exurbs, it’s too soon to tell whether people will return to their offices and reinvigorate 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 multiple challenges, including the rising cost of materials such as lumber, a tight labor market and strenuous land-use regulations. These have slowed the pace of home building, worsening the supply-demand imbalance.
Though Waller may not be concerned about the potential for a burst housing bubble, he did signal that the cost of housing is becoming a bigger concern for monetary policy.
“With housing costs gaining an ever-larger weight in the inflation Americans experience, I will be looking 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 such as the consumer price index likely underestimate the true scale of housing inflation.
Economists have suggested that housing inflation will only continue to grow in the coming months, given that there is typically a lag between when housing and rental costs rise and when those increases are recorded in the surveys that are used to produce inflation measures.
The recent run-up in interest rates could change the equation, though. February data on new and existing home sales showed some weakness, and many economists believe that higher mortgage rates will begin to constrain home-buying demand as affordability challenges mount.
On that front, Waller said that he was “hopeful that at least some of the pandemic-specific factors pushing up home prices and rents could begin to ease in the next year or so.”