Cristopher Waller, a member of the Federal Reserve’s Board of Governors, spoke today about the hot housing market, its impact on the economy, and what it means for the future…(Federal Reserve)
Waller on renting and the impact it has on lower-income households:
- “Early in the pandemic, rent growth slowed as demand dropped to live in dense areas where rental housing tends to be concentrated while some people, especially young adults, moved in with family and friends. However, more recently rents have accelerated sharply…Rent is a significant share of monthly expenses for many households, but lower income households spend a larger fraction of their budget on housing, so rising rents hit these households harder. “
Waller on homebuying and how rising prices have not deterred wannabe homebuyers…so far:
- “House prices are up a cumulative 35 percent since the beginning of the pandemic, according to the Zillow Home Value Index. That rate of increase is much faster than the previous five years and even faster than during the housing boom of the mid-2000s. Looking over the past two years, one would think the large increase in home prices would have made it more difficult for renters to become first-time buyers. Surprisingly, we have not seen evidence of that yet.”
How a downturn could impact homebuyers:
- “…unlike the housing bubble and crash of mid 2000s, the recent increase seems to be sustained by the substantive supply and demand issues I have detailed—not by excessive leverage, looser underwriting standards, or financial speculation. In fact, mortgage borrowers entered the pandemic with stronger balance sheets than in the mid 2000s and are therefore better prepared to handle a drop in home prices than they were in the last housing downturn.”
How banks could handle a downturn:
- “As for banks, as I just said, large banks are substantially more resilient today than two decades ago. In last year’s stress test, which featured a severe global recession that included a decline in home prices of over 20 percent, we projected the largest banks could collectively maintain capital ratios at more than double their minimum requirements—even after withstanding more than $470 billion in losses.”
Looking forward:
- “As housing costs continue to increase, housing will likely become an ever-larger share of household budgets. This is not a recent development. In 1972-1973, the average household spent 24 percent of expenditures on rent or imputed rent. This share rose to 27 percent in the late 1980s, and in 2019 that was up to 35 percent. No doubt the share in 2022 will be larger still. With housing costs gaining an ever-larger weight in the inflation Americans experience, I will be looking even more closely at real estate to judge the appropriate stance of monetary policy.”