Without Federal Reserve action, the housing market is headed for a bust:
Housing is booming. But without Federal Reserve action, it is headed inexorably for a bust, perhaps one severe enough to bring on a recession. Prudent Fed policy is the only hope of improving these prospects. But the policy itself must be carefully balanced or it will introduce problems of its own. History leaves reason for skepticism of the Fed’s ability in this regard, but conditions demand an effort nonetheless.
Presently, most of the push in housing is for higher levels of activity. Low mortgage rates buoy both buying and pricing. This year’s inflationary surge has reinforced the housing expansion by making low mortgage rates that much more attractive and driving many to seek in real estate a classic hedge against sill more inflation. But a countervailing force is developing. Rising house prices have begun to tax the limits of the average family’s income.
Certainly, the positive side of this equation has prevailed so far this year. Housing sales remain robust. Between August and September new home sales rose almost 14%. Though the figure is down some 18% from a year ago, last year’s strength reflected the unusual impact of the pandemic. September’s sales level was 18% above 2019’s average. Construction activity in October, though down from August’s spike, was still above year-ago levels and almost 18% above 2019’s average.
The Fed’s pursuit of low mortgage rates has done most of the driving. In 2018, the average new mortgage carried a rate of nearly 5%. Now, that rate is just under 3%. Consider that even as median home prices have risen 32% since 2019, these lower mortgage rates have kept the burden of supporting a mortgage manageable. What is more, most people know that rates will not remain this low indefinitely, driving some who might have waited to crowd into this year’s market.
More recently, inflationary pressures have provided still another buying spur. Consumer prices have risen at about 7% annual rate so far this year. No one knows whether this rate of increase will persist, but people can see that inflation has vastly increased the appeal of low mortgage rates. Consider that a borrower paying 3% on his or her loan is making the payment with dollars that are worth some 7% less than a year ago, effectively gaining 3% a year in real terms on the deal.
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