The United States cannot allow the housing market to “boom and bust,” warns Fed official

A senior Federal Reserve official has warned the United States that it cannot allow a “boom and bust cycle” in the housing market that threatens financial stability, in a sign of growing concern over rising property prices in the central bank.

“It’s very important for us to get back to our 2 percent inflation target but the goal is to make it sustainable,” Eric Rosengren, the president of the Boston Fed, told the Financial Times. “And to be sustainable, we can’t have a boom and bust cycle in something like real estate.

“He doesn’t expect us to have a bust.” But I think it’s worth paying close attention to what’s happening in the real estate market, ”he said.

According to data released by the National Real Estate Association last week, the average price for existing home sales was up 23.6 percent year-on-year in May, surpassing $ 350,000 for the first time.

Rosengren said that in the Boston real estate market, it had become common for buyers only to have a prevailing number of bids, and that some had decreased home inspections to gain an advantage with sellers.

“You don’t want too much exuberance in the housing market,” Rosengren said. “I would just add that the boom and bust cycles in the real estate market have taken place in the United States many times, and around the world, and often as a source of financial stability concerns.”

He said u housing market in fury it should be a factor that the central bank plans to slow down or remove some of the strong monetary support for the economy introduced during the coronavirus pandemic.

The Fed acquired $ 40 billion in mortgage-backed securities from the agency last month alongside $ 80 billion in monthly Treasury debt as part of its asset purchase program.

Fed officials are now beginning to discuss cutting that bond purchase. And Rosengren said that “when it is approved” to begin this process, the purchase of mortgage-backed securities should be reduced to the same pace as Treasury acquisitions. This will mean that direct support to real estate finance will pay off sooner.

“This would imply that we will stop buying MBS long before we stop buying Treasury securities,” he said.

James Bullard, president of the St. Louis Fed, is among those who have asked the Fed to reassess its support for the real estate market in the context of what he noted were broader concerns about a bubble nascent.

Robert Kaplan, president of the Dallas Fed, also argued that the acquisitions will end “sooner rather than later,” especially given growing evidence of financial speculation in the housing market.

The Fed said it will begin reducing its asset purchases only when it has made “further substantial progress” toward its targets of 2 percent average inflation and full employment.

Following the rapid recovery, Rosengren said “the conditions for thinking about whether we will make further substantial progress will likely be met before the start of next year.”

The latest economic projections from the Fed has shown central bank officials that they will raise interest rates from their current level in 2023, earlier than previously forecast. They also exposed a larger split in the Federal Open Market Committee over the expected path of monetary policy than had been the case.

“There’s a lot of uncertainty in the forecast,” Rosengren said. “Some people have to grow very fast [and] the conditions for a reinforcement policy can happen sooner. And other people will think the recovery will be a little slower. ”