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A senior Federal Reserve official has warned that the United States cannot afford a “boom and turn cycle” in the housing market that would jeopardize financial stability, in a sign of growing concern over rising property prices on the central bank.
“It’s very important for us to get back to our 2% inflation target, but the goal is to make it sustainable,” Eric Fed Rosengren, president of the Boston Fed, told the Financial Times. “And for this to be sustainable, we cannot have a cycle of boom and twist in something like real estate.
“I am not predicting that we will necessarily have a mistake. But I think it’s worth paying close attention to what’s happening in the real estate market, ”he said.
According to data released by the National Association of Realtors last week, the average price of existing home sales rose 23.6% year-on-year in May, topping $ 350,000 for the first time.
Rosengren said that in the Boston real estate market it had become commonplace for cash-only buyers to prevail in bidding tenders and that some have been declining home inspections to gain an edge with sellers.
“You don’t want too much exuberance in the real estate market,” Rosengren said. “I would just point out that the boom and bust cycles of the real estate market have occurred in the United States several times and around the world, and often as a source of financial stability concerns.”
He said roaring housing market it should be a factor as the central bank considers slowing down or eliminating some of the strong monetary support for the economy introduced during the coronavirus pandemic.
The Fed has been buying $ 40 billion a month in agency mortgage-backed securities, along with $ 80 billion a month in Treasury debt, as part of its asset purchase program.
Fed officials are now beginning to discuss reducing this bond purchase. And Rosengren said that “when it’s appropriate” to start this process, mortgage purchases should be reduced at the same rate as Treasury purchases. This would mean that direct support for housing finance would be liquidated more quickly.
“That would mean we would stop buying MBS long before we stop buying Treasury securities,” he said.
James Bullard, president of the St. Louis Fed, is one of those who has called on the Fed to reassess its support for the real estate market in the context of what he noted were broader concerns about a rising bubble.
Robert Kaplan, president of the Dallas Fed, has also advocated that purchases end “sooner rather than later,” especially given the growing evidence of financial speculation in the real estate market.
The Fed has said it would start reducing its asset purchases only when it had advanced “substantially” towards its 2% average inflation and full employment targets.
Given the rapid recovery, Rosengren said “the conditions are likely to be met to think about whether we have made substantial substantial progress before early next year.”
The last economic Fed projections showed central bank officials raising interest rates relative to their current level of funds in 2023, ahead of schedule. They also exposed a greater division within the federal open market committee on the expected path of monetary policy than had been the case.
“There’s a lot of uncertainty in the forecast,” Rosengren said. “Some people will grow very fast [and] the conditions for tightening policy may be happening sooner. And other people will think that the recovery will be a little slower.
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