The US cannot afford a “boom and bust” in the housing market, warns Fed officials

A senior Federal Reserve official has warned that the US cannot afford a “boom and bust cycle” that would threaten financial stability, a sign of growing concern about rising house prices at the central bank.

“It’s very important for us to get back to the 2% inflation target, but the goal is to make that sustainable,” Boston Rosary President Eric Rosengren told the Financial Times. “And to make that sustainable, we can’t have something like the real estate sector.

“I don’t anticipate that we will necessarily have a bust. But I think it’s worth paying special attention to what’s happening in the housing market, ”he said.

According to data released by the National Real Estate Association last week, the average price of existing home sales rose 23.6% year-on-year in May, reaching $ 350,000 for the first time.

Rosengren said it has become commonplace in the Boston real estate market to dominate those who only buy money in bidding competitions, and some are downsizing home inspections to take advantage of sellers.

“You don’t want a lot of exuberance in the housing market,” Rosengren said. “I would point out that cycles of growth and growth in the real estate market have occurred several times in the United States and around the world, and often as a source of concern for financial stability.”

He said a balanced housing market it should be a factor as the central bank thinks of slowing down or eliminating large subsidies to the economy plunged into the coronavirus pandemic.

The Fed buys $ 40 billion a month along with the agency’s mortgage-backed securities as part of its $ 80 billion-a-month treasury debt purchase program.

Faith officials have begun discussing how to cut that bond purchase. And Rosengren said that when the process begins, “when it’s appropriate,” purchases of mortgage-backed securities should be reduced at the same rate as Treasury purchases. This would mean that direct support for housing financing would wind up faster.

“That means we would stop buying MBS long before we stop buying Treasury securities,” he said.

James Bullard, president of the St. Louis Faith, said those who asked for a reassessment of the Fed’s support for the housing market said there were broader concerns about a born bubble.

Dallas Fed Chairman Robert Kaplan has also advocated ending purchases “sooner rather than later,” especially as evidence of financial speculation in the housing market intensifies.

The Fed said it will begin reducing asset purchases “after achieving significant progress on its” 2% average inflation and targets for full employment. ”

Seeing the rapid recovery, Rosengren said “the conditions for thinking about whether we have made significant progress will be met before the start of next year.”

The latest economic Fed projections showed that central bank officials are raising interest rates in 2023, ahead of schedule. They also showed a greater distribution within the Federal Open Market Commission in the hope of monetary policy.

“There’s a lot of uncertainty in the forecast,” Rosengren said. “Some will grow very fast [and] it may be that the conditions for tightening the policy will happen sooner. And others will think the recovery will be a little slower. “