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Does America’s hot housing
market still need propping
up?
Fed officials debate whether and when to
taper support
Jul 1st 2021

“TRULY EXTRAORDINARY.” That was how Craig Lazzara of S&P
Global, the firm that compiles a widely watched measure of
house prices in America, described its reading for the month
of April, released on June 29th. House prices rose by 14.6%
year over year, the fastest rate in the 34-year history of the
index (see chart, top panel). Houses listed for sale are on
average snapped up in just 17 days, a record low. On Reddit,
a social-media site, would-be buyers bemoan missing out on
house after house because they are unwilling to forgo
inspecting the property on which they plan to spend
hundreds of thousands of dollars, something that most
successful buyers are apparently doing.

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The Federal Reserve still has monetary policy on ultra-loose
mode. Interest rates are anchored at zero and the central
bank is buying $120bn-worth of assets each month—$80bn
of Treasuries and $40bn of mortgage-backed securities—in
order to depress long-term interest rates. This stance is in
many ways still justified. There are 7.6m fewer jobs in
America than there were before the pandemic. A large
minority of adults remains unvaccinated. And yet consumer-
price inflation has climbed to an annual rate of 4.9%, and
commodities and labour are in short supply. A real-time
estimate of economic output compiled by the Federal
Reserve Bank of Atlanta puts annualised GDP growth in the
second quarter at a heady 8.3%. If true, America has
recovered all the output lost during the pandemic and even
added more.

The case of the housing market aptly illustrates how
different corners of the economy are pulling the Fed along at
different speeds, if not in different directions. The current
property craze is at least in part spurred on by loose
monetary policy. Low mortgage rates, which are a function
of prevailing yields on mortgage-backed securities, tend to
entice would-be homebuyers. Given that the housing market
is already fired up, it might seem odd that the Fed is juicing it
further by buying mortgage-backed securities and
suppressing mortgage rates.

Even some Fed officials
are discomfited by this
turn of affairs. In an
interview with the
Financial Times on June
27th Eric Rosengren, the
president of the Boston
Fed, said that America
could not afford a
“boom-and-bust cycle”
in the housing market
that would threaten
financial stability. He is
not alone. Robert Kaplan,
the head of the Dallas
Fed, has said that there
are “some unintended
consequences and side-

effects of these [mortgage-backed-security] purchases that
we are seeing play out”, including contributing to rocketing
house prices. James Bullard, the president of the St. Louis
Fed, told CNBC on June 18th that “maybe we don’t need to
be in mortgage-backed securities with a booming housing
market.”

At the Fed’s monetary-policy meeting on June 15th and 16th
Jerome Powell, its chairman, made clear that the central

bank is not yet ready to stop buying assets, but has begun to
discuss when might be appropriate. One option might be to
do what Mr Rosengren called a “two-speed taper”, slowing
mortgage purchases more quickly than purchases of
Treasuries. If housing needs less support than the wider
economy this seems a sensible step. The Fed has already
begun to offload corporate bonds bought through an
emergency programme launched in spring 2020, because
the liquidity crunch that prompted intervention has abated.

A two-speed taper probably would not dent the housing
market by much. For a start, the heat seems also to reflect a
fall in supply during the pandemic, rather than low rates
alone. And in any case, it is not as if the mortgage-backed-
security market operates in isolation from broad monetary
conditions. Yields tend to closely track those of Treasuries,
even when the Fed is not buying up assets (see chart,
bottom panel). If the central bank is not ready to tighten
monetary policy yet, then a hot housing market might be a
side-effect it has to live with. Still, it probably does not need
to egg property prices on. ■

A version of this article was published online on June 30th
2021

This article appeared in the Finance & economics section of
the print edition under the headline “On the simmer”

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