A top Federal Reserve policymaker cautioned that skyrocketing home prices could jeopardize progress on recovering the millions of American jobs lost in the pandemic.
Federal Reserve Bank of Boston President Eric Rosengren told Yahoo Finance Friday that the hot real estate market is “not at a point where we should be panicked.” But Rosengren said the Great Depression and other downturns were examples of economic expansions that died at the hands of a real estate bubble.
“The last thing we want to do is to try to get to full employment, and then unintentionally cause a boom and bust of the housing sector that prevents us from getting to full employment or staying at full employment,” Rosengren said.
Home prices have been surging at record levels, with the S&P CoreLogic Case-Shiller national home price index gaining 13.2% in March — the fastest pace since December 2005.
Rosengren said today’s housing market resembles the housing market of the 2005 to 2007 period.
“If this were to continue and if it was starting to get embedded in people's expectations for where prices would be going, that would start to become a more significant concern,” Rosengren told Yahoo Finance.
Trade-off with the labor market?
Rosengren’s concern: a housing bubble could put an abrupt end to the economic recovery, where employment levels remain 7.6 million people short of where they were pre-pandemic.
The Fed has pinned short-term borrowing rates at near zero since the depths of the pandemic to support businesses and their capacity to hire workers.
But that easy money policy is the same reason why the housing market is so hot.
Expectations for lower-for-longer interest rates also depressed 30-year mortgage rates, fueling a frenzy for homebuying as families relocated in the middle of the COVID-19 crisis. A lack of inventory, in part due to supply chain constraints on resources like lumber, have also bid home prices higher.
Signals from the Fed on eventual rate hikes have tilted those borrowing costs higher, with the benchmark mortgage rate breaking through the 3% mark. Higher rates appear to be moderating home prices, as existing home sales fell for the fourth month in a row.
“I think I would say it's been downgraded from blistering to sizzling,” SitusAMC Managing Director Tim Rood told Yahoo Finance Friday.
Another wrinkle to the effect of Fed policy: the central bank buying $40 billion a month in agency mortgage-backed securities (MBS). The so-called quantitative easing program is designed as a supplemental way to depress longer-term interest rates.
As the Fed considers slowing its pace of overall asset purchases (which includes a separate $80 billion a month in U.S. Treasury purchases), Rosengren expressed doubt that the mortgage market needs more support.
“If we decrease the same amount of [U.S. Treasuries as agency mortgage-backed securities] when we do start tapering, that would mean we'd stop the MBS program well before we stopped the Treasury program,” Rosengren said.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.