“I’m not predicting we’ll necessarily have a bust” in the housing market, Eric Rosengren, president of the Federal Reserve Bank of Boston, emphasized in an interview with the Financial Times published 29 June.
“But it’s worth paying close attention to what’s happening in the housing market,” he added.
Housing prices rose 23.6 percent in May, year over year, according to the National Association of Realtors, passing $350,000 for the first time.
“It’s very important for us to get back to our 2-percent inflation target,” Rosengren said, “but the goal is for that to be sustainable – and for that to be sustainable, we can’t have a boom-and-bust cycle in something like real estate.”
Rosengren’s comment invoked memories of the home-buying frenzy in the first years of this century, which set off the Great Recession when the housing market imploded in 2006.
To nurse the economy through 2020’s collapse and subsequent recovery, the Fed has been buying $40 billion a month in mortgage-backed securities in addition to $80 billion a month in Treasury debt.
“When it is appropriate” to wind down those purchases, the Fed should slow its buying of both forms of securities at the same pace, Rosengren said, meaning that the central bank would withdraw from the housing market more quickly than from the broader economy.
“We would stop purchasing mortgage-backed securities well before we stopped purchasing treasury securities,” he said.
James Bullard, president of the Federal Reserve Bank of St. Louis, has called for the Fed to reconsider its support of the housing market due to growing concerns that a housing bubble is forming.
TREND FORECAST: As we noted in our 22 June, 2021, article “Fed Policies Continue to Fuel Housing Frenzy,” housing prices will fall closer to Earth in the next few months as quality homes for sale become as scarce as buyers well-off enough to pay today’s absurdly inflate prices.
As the market cools, prices will fall but will not plunge catastrophically as they did in the Great Recession.
Although we will not repeat 2006’s housing market collapse, vast numbers of buyers are likely to find the value of the homes they were so eager to buy this year falling into the future.