Risks and the Housing Outlook

Eakinomics: Risks and the Housing Outlook Housing is at the center of the evolving economic outlook and economic monetary challenges. Indeed, as AAF’s Thomas Wade put it in his recent advisory on How Not To Blow Up the Housing Market: “Depending on interpretation, the housing market is either boiling or has already collapsed. The economy writ large is either strong or in a recession.” To aid in the assessment, Wade regularly updates the AAF Housing Chartbook; the latest edition is available today. Looking at these data, one can see that the Federal Reserve’s anti-inflation efforts are having a clear impact on housing. The Fed has raised interest rates, but spreads on mortgage rates over Treasuries have widened as well, probably the result of the “quantitative tightening” – shrinking the Fed balance sheet by $35 billion monthly in mortgage-backed securities. Demand to refinance existing mortgages has essentially fallen to zero and new mortgages to purchase homes are down sharply. Not surprisingly, across the nation house price increases have moderated or even turned negative. The spillover to housing starts, residential construction, and the broader macroeconomy will grow in magnitude over the coming quarters. In his assessment, Wade concluded “while there is little Congress and the federal agencies can do to improve housing supply in the short term, they could do much in haste and good intentions that would further muddy the economic waters. At worst, further demand-side subsidies would undo the Fed’s efforts, increasing the pain of inflation, the risks of recession, and the length of economic recovery.” Treacherous times, indeed! He added, however, “Such a challenging time for the housing market would not represent the safest testing ground for Congress or the federal agencies to experiment with sweeping changes to how the market operates.” In light of this, the first public speech of Michael Barr, the newly confirmed Vice Chair for Supervision at the Fed, is of some interest. Far from seeking to minimize impacts on housing, mortgage, and financial markets, he lays out an aggressive and interventionist agenda for the regulatory future. Like the entire bevy of Biden financial regulators, he places a premium on “fairness” in outcomes and is skeptical of all mergers. But there is a substantial list of other issues on his agenda. On climate change, he argues that “The Federal Reserve’s mandate in this area is important but narrow.” Assessing the impact of climate change is hardly narrow, and among the financial risks perhaps not that important. Although climate impacts should be integrated into stress tests, he treats the two separately and simply argues: “They’re supposed to be stressful,” he said. “They’re supposed to be tough. And I want to make sure that they are that way.” Finally, he took dead aim at stablecoins, in particular, and crypto, in general. On the former, “History shows that in the absence of appropriate regulation, private money is subject to destabilizing runs, financial instability and the potential for widespread economic harm.” On the latter, “In a rapidly rising and volatile market, participants may come to believe that they understand new products only to learn that they don’t, and then suffer significant losses.” The notable common feature of these views is that they focus exclusively on potential costs and do not acknowledge any potential benefits of these innovations. The future of financial market and housing finance regulation is among the evolving risks to the housing market and bears close scrutiny.