Home Prices Are Soaring. Is That the Fed’s Problem?
Low interest rates are one reason that the housing market has taken off. They are far from the only one.
Across the Nation
Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, has been nervously eyeing the housing market as he ponders the path ahead for monetary policy. Home prices are rising at a double-digit pace this year. The typical house in and around the city he calls home sold for $306,031 in June of this year, Zillow estimates, up from $261,710 a year earlier.
“It’s making me nervous that you’ve got this incipient housing bubble, with anecdotal reports backed up by a lot of the data,” James Bullard, the president of the Federal Reserve Bank of St. Louis, said. He doesn’t think things are at crisis levels yet, but he believes the Fed should avoid fueling the situation further. “We got in so much trouble with the housing bubble in the mid-2000s.”
Policymakers don’t need to look far to see escalating prices, because housing is growing more expensive nearly everywhere. Buying a typical home in Boise, Idaho, cost about $469,000 in June, up from $335,000 a year ago, based on Zillow estimates of local housing values. A typical house in Boone, N.C., is worth $362,000, up from $269,000. Prices nationally have risen 15 percent over the past year, Zillow’s data shows.
The FED’s Role
The FED’s policies definitely help to drive demand. Bond-buying and low Fed interest rates make mortgages cheap, inspiring people to borrow more and buy bigger. But rates aren’t the sole factor behind the home price craze. It also traces back to demographics, a pandemic-spurred desire for space, and a very limited supply of new and existing homes for sale — factors outside of the central bank’s control.
“The rapid price appreciation we’re seeing is Econ 101 unfolding in real time,” said Chris Glynn, an economist at Zillow.
The Good News
There are early signs that the market might be bringing itself under control. Applications for new mortgages have slowed this year, and existing home inventories have risen somewhat. Many housing economists think price increases should moderate later this year.
All in All
For now, your local housing market boom (especially California’s) is probably going to be left to its own devices — meaning that while first time home buyers may end up paying more, they will also have an easier time financing it. Interest rates are so low and money is cheap. There is little to get in the way of people wanting to buy homes.