WASHINGTON–A governor on the Federal Reserve Board said the appreciation in home prices may have forced many would-be buyers to the sidelines, but the trendline poses less risk to financial stability than similar increases in the mid-2000s that led to a housing bubble and subsequent collapse.
In his conference remarks, titled “Recent Fiscal and Monetary Policy: Implications for U.S. and Israeli Real Estate Markets,” Gov. Christopher Waller said he has been monitoring on the effects of rising home prices – now up 35% since the start of the coronavirus crisis in spring 2020 – on financial stability, but for now he believes the market is under less pressure than in past home price increase periods.
“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 I have detailed – not by excessive leverage, looser underwriting standards, or financial speculation,” Waller told the meeting. “In fact, mortgage borrowers entered the pandemic with stronger balance sheets than in the mid 2000s and are therefore better prepared to handle a drop in home prices than they were in the last housing downturn.”
Banks More ‘Resilient’
In addition, Waller said, the nation’s large banks are far more resilient today than several decades ago.
“In last year’s stress test, which featured a severe global recession that included a decline in home prices of over 20%, we projected the largest banks could collectively maintain capital ratios at more than double their minimum requirements – even after withstanding more than $470 billion in losses,” Waller stated.
Waller said he remains hopeful the factors that have been pushing up home prices and rents will begin to ease in the year to come.
More Housing Units
“The level of new housing units completed in 2021 was higher than at any point since 2007,” he said. “The demand for extra space at home might level off, or even reverse if people start to spend more time away from home again as the pandemic eases. That said, input prices continue to rise, with lumber prices increasing past their eye-popping 2020 peak, even with much more supply.”
Nevertheless, looking forward, Waller is anticipating home costs as a share of expenses for households will continue to rise over time from their 35% of household budgets in 2019.
“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,” he added.
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