Houses in the Mountain’s Edge development in the Las Vegas Valley.
Roger Kisby/Bloomberg
Central bankers routinely deny any connection between their monetary policies and asset prices, even though that’s how those policies are transmitted to the real economy. “Pay no attention to that man behind the curtain,” they all but insist, as the lightning and smoke jumps and hisses while they manipulate the controls, believing that they’re shrouded from view.
So it wasn’t surprising that Federal Reserve Chairman Jerome Powell, at his recent press conference, pointed to other factors for the rallying stock market, including the convulsions in names such as GameStop (ticker: GME) and the expected positive effects from Covid-19 vaccines and fiscal stimulus.
But when asked about the housing market—specifically, the jump in prices and what pace of increase might induce a change in the Fed’s $40 billion monthly purchases of agency mortgage-backed securities—Powell demurred from connecting the two.
He called the double-digit annual surge in home prices a “passing phenomenon” related to the pandemic. “There’s a one-time thing happening with people who are spending all of their time in their house. And they’re thinking either I need a bigger or I need another house, and a different house. Or a second house, in some cases. So there’s a one-time shift in demand that we think will get satisfied, also that will call forth supply. And we think that those price increases are unlikely to be sustained for all of those reasons.”
But Joseph Carson, former chief economist at AllianceBernstein, observes that Powell also said “out of the other side of his mouth, ‘The housing sector has more than fully recovered from the downturn, supported in part by low mortgage interest rates.’ ” Never did the Fed chief ever address the question of throttling back the central bank’s purchases of mortgage securities, Carson adds in an email.
The robustness of the housing and mortgage markets are amply evident, however. In December, sales of existing homes were more than 22% above the year-earlier level, with the median price up 12.9%, to $309,800. New-home sales rose 19%, with the median price rising 8%, to $335,900.
And the S&P CoreLogic Case-Shiller 20-city composite home index prices were up 9.1% in November—the latest month for which a reading is available—from those a year earlier.
The mortgage market has been cooking as a result, with a record $4.04 trillion in home loans originated last year, according to a report that Carson passed along from the American Enterprise Institute, a conservative-leaning think tank. Refinancings have been especially hot, the AEI says, with cash-outs up 55% and no-cash-outs up 185%, as homeowners took advantage of record-low interest rates.
J.P. Morgan analysts predict that $500 billion in mortgage-backed securities will be issued this year by U.S. agencies, such as Ginnie Mae, Fannie Mae, and Freddie Mac, most of which would be absorbed by the Fed’s $480 billion annual agency MBS purchases. The Fed’s $2.07 trillion MBS portfolio throws off $80 billion a month that has to be reinvested—at a rate twice as much as its net new purchases—which adds to the volume of securities being absorbed.
All of which has pushed mortgage rates to record lows—2.73% for a conventional 30-year fixed-rate loan, a hair above the nadir of 2.65% in late December, according to Freddie Mac. Filling “the monetary punch bowl is fueling rampant home price appreciation,” the AEI said. It looks for its home price appreciation index to accelerate to a 14% year-over-year rate in 2021, from 11% in December and 6% a year earlier. The strongest gains will be in the top and middle-high tiers favored mainly by trade-up buyers. But the low and medium-low tiers, which attract mostly first-time purchasers, are likely to see affordability suffer, even in regions that previously have been more affordable, it added.
As noted above, Powell has called the home-price surge “a passing phenomenon” that “will call forth supply” to meet demand. The AEI contends that won’t be so easy. Restrictive land-use regulations in states such as California are holding down housing construction. New supply is forthcoming in the South and Southwest, which is attracting in-migration from the work-from-home trend.
Given all this, the AEI wonders what justification there is for the Fed to continue purchasing agency mortgage securities—effectively subsidizing an economic sector that’s booming and thus putting houses out of reach for many first-time buyers.
Indeed, Steven Ricchiuto, chief economist at Mizuho Securities USA, expects the Fed to begin to taper its purchases, albeit not until the second half of 2022. He looks for the central bank to reduce its buying incrementally, while long-term rates rise, “to avoid excess speculation in the housing market,” he writes in a research report. “Memories of the financial crisis remain very fresh in the minds of regulators some 12-to-14 years after the fact,” he adds.
Meanwhile, the Fed will continue to help stoke home-price appreciation, which won’t be fully reflected in government inflation data. As Joseph Carson pointed out in November, if the consumer-price index actually captured the surge in home prices, it would be rising at about a 3% annual clip, twice the official calculation. But shelter costs are mainly influenced by rents, which have been depressed by the flight to the suburbs and the urge to buy a house.
The Fed continues to pursue its goal of lifting its favored inflation measure—the personal-consumption expenditures price index—so it averages over 2% for a period. As the government measures it, the index was up only 1.3% in December from its level a year earlier. By this criterion, Powell & Co. are falling short of hitting their inflation target, despite soaring house prices. But despite that contradiction, pay no mind to what’s going on behind the curtain.
Write to Randall W. Forsyth at [email protected]
