Federal Reserve: Stable Housing Market Can Thank Steady Interest Rates
Federal Reserve Board Vice Chairman Donald Kohn (pictured) says a “stabilization” that seems to be taking place in the housing market may be vulnerable to a rise in long-term interest rates - or even a decision by the Fed NOT to lower short-term interest rates.
Speaking to members of the Atlanta Rotary Club, Kohn said housing prices are still high relative to rents and that inventories of unsold homes have only started to edge lower.
“Uncertainty about where we stand in the housing cycle remains considerable,” Kohn said. One reason for the uncertainty, he continued, is that the downturn “was not triggered by a restrictive monetary policy and high [mortgage interest rates].”
On the contrary, Kohn asserted: relatively low intermediate and long-term interest rates “are helping to support the stabilization of this sector.” But the downturn did follow “an unusually large run-up” in housing sales, construction and prices.
“Our uncertainty about what pushed home prices and sales to those elevated levels raises questions about how the market will adjust now that expectations of the rate of house price appreciation are being trimmed,” Kohn said.
Kohn said housing starts “may be not very far from their trough, but the risks around this outlook still are largely to the downside.”
Price appreciation has slowed nationally, and appears to have fallen in some markets, but prices are still high relative to rents and interest rates. Although building permits decreased substantially again in November, inventories of unsold homes have only started to edge lower.
It’s unknown, Kohn said, if “the possible stabilization that seems to be taking hold would be immune to a rise in longer-term interest rates should term premiums increase or the federal funds rate fail to follow the downward path currently built into market expectations.”
Even If the housing market begins to stabilize at current levels, overall construction activity would still remain a negative for the growth of economic activity in the first half of this year.
In voting to leave the federal funds rate unchanged at its Dec. 12 meeting, members of the Federal Reserve Board’s Open Market Committee said developments in the housing market “continued to weigh heavily on economic activity.”
However, the committee “remained concerned about the outlook for inflation” and left open the possibility of future interest-rate increases to keep inflation in check.