Even the monetary wonks who pull the magic money levers and decide to inflate or deflate asset bubbles are fed up with the red hot housing market.
On Thursday, Fed Governor Christopher Waller told an audience at the “Recent Fiscal and Monetary Policy: Implications for U.S. and Israeli Real Estate Markets” conference that his home search in the Washington Metropolitan Area wasn’t going well because of low inventory and high prices.
“As we all know, a singular feature of the U.S. expansion since the COVID-19 recession has been the red-hot housing market.
“Trust me, I know it is red hot because I am trying to buy a house here in Washington and the market is crazy. Both house prices and rents are up significantly across the nation, while vacancy rates for rented and owner-occupied homes are down,” Waller said.
Waller is competing in the D.C. market, where home prices are up 20% since the virus pandemic. Inventory is extremely tight, which has pushed some buyers into areas outside the Capital Beltway and into Maryland and Virginia.
The boom in housing prices is a combination of an ultra-aggressive dovish fed policy by slamming interest rates to the floor, panic buying hundreds of billions of dollars of mortgage-backed securities, and tight housing inventory, driving prices sky-high.
Waller has been on the hawkish side of things as the Fed began last week’s rate hiking cycle. He told CNBC last Friday, “I really favor front-loading our rate hikes, that we need to do more withdrawal of accommodation now if we want to have an impact on inflation later this year and next year.”
Fed members have been overly hawkish as inflation soars to four-decade highs and asset prices across the board are considered ‘elevated.’ Rate traders are pricing in at least 7.8 hikes through the end of this year with an implied rate of about 1.96%. 30Y mortgage rates have risen to 4.42% this year after beginning the year, around 3.30%.
The 3-month change in 30Y mortgage rates has been one of the fastest up moves on record, making the case a housing affordability crisis is nearing.
The good news for Waller is that housing demand is about to fall off a cliff, especially in a recession/stagflation. The bad news is BofA’s latest housing market note shows an ugly picture: one of the biggest challenges in the housing market has been dwindling supply, which has reached new record lows.
Given these extraordinary supply challenges, BofA expects home prices to stay hot this year despite plunging housing affordability. Waller might have to wait another year as the housing market has its last hurrah until prices slump.
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