New York Times
Home Prices Are Soaring. Is That the Fed’s Problem?
Low interest rates are one reason that the housing market has taken off. They are far from the only one.
By Jeanna Smialek Published July 31, 2021. Updated Aug. 1, 2021
Excerpts:
Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, has been nervously eyeing the housing market as he ponders the path ahead for monetary policy. Home prices are rising at a double-digit pace this year. The typical house in and around the city he calls home sold for $306,031 in June of this year, Zillow estimates, up from $261,710 a year earlier.
Policymakers don’t need to look far to see escalating prices, because housing is growing more expensive nearly everywhere. Prices nationally have risen 15 percent over the past year, Zillow’s data shows, in line with the closely watched S&P CoreLogic Case-Shiller index of home prices, which rose a record 16.6 percent in the year through May.
Bidding wars are frustrating buyers. Agents are struggling to navigate frantic competition. About half of small bankers in a recent industry survey said the current state of the housing market poses “a serious risk” to the United States economy. Lawmakers and economic policymakers alike are hoping things calm down. In short, it’s a situation that many are feeling acutely with no single policy to blame and no easy fix.
Fed officials face a particularly tricky calculus when it comes to housing. “Interest rates are one factor that’s supporting demand, but we really can’t do much about the supply side,” Jerome H. Powell, the Fed chair, explained during recent congressional testimony. Mr. Powell said at a subsequent news conference that the economy remains short of the central bank’s jobs target.
Demand for housing was strong in 2018 and 2019, but it really took off early last year, after the Fed cut interest rates to near-zero and began buying government-backed debt to soothe markets at the start of the pandemic. Mortgage rates dropped, and mortgage applications soared.
Home supply fell across the residential real estate market following the mid-2000s housing bust, as construction slumped thanks in part to zoning regulations and tough financing standards. Shortages in lumber, appliances and labor have emerged since the pandemic took hold, making it hard for builders to churn out units fast enough.
“The rapid price appreciation we’re seeing is Econ 101 unfolding in real time,” said Chris Glynn, an economist at Zillow.
So what can the Fed do about any of this? Officials have suggested that it might make sense for the Fed to slow its monthly purchases of Treasury debt and mortgage-backed securities soon, and quickly, to avoid giving housing an unneeded boost by keeping mortgages so cheap. Discussions about how and when the Fed will taper off its buying are ongoing, but most economists expect bond-buying to slow late this year or early next. That should nudge mortgage rates higher and slow the booming market a little.
For now, your local housing market boom is probably going to be left to its own devices — meaning that while first time home buyers may end up paying more, they will also have an easier time financing it.
Comment:
Why do economists often limit their thinking to monetary policy to solve problems? Can we not think “outside the box”? Let’s try moving over to tax policy for a change. In order to reduce the cost of housing, local governments should look to improving the traditional property tax. A better model is called a “split-rate” land value tax.
Rick Rybeck, Director and Founder of Just Economics, LLC, says: By reducing the tax rate on privately-created buildings and increasing the tax rate on land, cities can reduce the price of both houses and land without any additional expenditure or loss of revenue. The lower tax rate on buildings makes them cheaper to build, improve and maintain. The higher tax rate on land reduces the profits from land speculation, which keeps land prices more affordable. Further, revenue from taxes on land can serve public purposes, making public infrastructure more financially self-sustaining.
Tom Gihring, Research Director
Common Ground OR-WA
