Jerome Powell on Housing Supply and Lock in Effect
During yesterday’s FOMC press conference, Federal Reserve Chair Jerome Powell announced that the Fed chose to pause rate hikes, as expected by the majority of analysts.
While Powell spoke in length about the labor market and inflation, he also spoke about housing a total of five times during the press conference. On today’s Hot Sheet, host Byron Lazine broke down the press conference—and we’re sharing all of Powell’s comments specific to the housing below.
POWELL’S INTRODUCTORY COMMENTS ON HOUSING
During Powell’s introductory remarks, he mentioned the housing sector two times. The first mention came at 01:42:
“Recent readings on consumer spending have been particularly robust. Activity in the housing sector has picked up somewhat, though it remains well below levels of a year ago largely reflecting higher mortgage rates. Higher interest rates also appear to be weighing on business fixed investments.” Jerome Powell – Federal Reserve Chair
As Byron pointed out, when Powell references an increase in activity in the housing sector, he’s speaking about a longer run than the past couple of weeks. Many agents, especially over the past two weeks, have felt activity in the market slowing.
At 04:35, Powell touched on housing again, as how spoke about consumers feeling the effects of inflation the most:
“My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing and transportation We are highly attentive to the risks that high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2% objective.” Jerome Powell – Federal Reserve Chair
HOUSING SUPPLY AND THE LOCK-IN EFFECT
Kyle Campbell from American Banker asked two direct questions about the housing market—specifically housing supply and the mortgage lock-in effect—at 42:51. Campbell asked the following:
“You’ve said slower shelter cost growth is in the pipeline and will reflect in inflation readings as new leases are signed, but there’s also some questions out there about the way housing costs are measured, particularly the use of rental equivalence which are estimates from homeowners about what their homes would rent for if they were in the rental market.
“So my question is, how much of the effort to tame inflation, both as it’s measured and felt by the broader public, hinges on housing supply? And then as far as a constrained housing supply being sort of exacerbated by this sort of lock-in effect of mortgages being higher now than they were at their recent historic lows—how is that going to impact future thinking about taking interest rates to that lower Bound in the future?”
Powell responded first to the question about supply, without making any mention of rent estimates from homeowners. On the Hot Sheet, Byron pointed out that this is probably because Powell knows it’s an ineffective measure for rental prices.
“So on the supply point, of course, supply is very important over time in setting house prices and for that matter rents. And so supply is kind of structurally constrained. But in terms of where inflation’s going in the near term though, as you obviously know, a lot of it is leases that are running off and then being re-signed or re-leased at a level that’s not as—it won’t be that much higher. A year ago it would have been much higher than it was a year before, now it may be below or at the same level. So as those leases are rolling over we’re seeing what we expect, which is measured housing services inflation coming down.” Jerome Powell – Federal Reserve Chair
Next, Powell spoke about how the mortgage lock-in effect is impacting consumers.
“I would look at the lock-in…the idea being that people are in very low rate mortgages, and even if they want to move, it would be hard because the new mortgage would be so expensive. And that’s explaining some of the—that’s one of the explanations for what’s happening broadly in the labor market.
“Would that play a role in our future decisions in a future loosening cycle about whether we would cut rates? No, I don’t think it would…I think we’d be looking at…fundamentally what rates does the economy need? And you know in an emergency like the pandemic or during the global financial crisis, you have to cut rates to the point that you get to do what you can to support the economy. So I wouldn’t think that that would be a reason for us not to do that. It’s not something we’re thinking about at all right now, but down the road, I wouldn’t think so.” Jerome Powell – Federal Reserve Chair
Powell’s final line, “It’s not something we’re thinking about at all…” sums up how the FOMC feels about housing right now. And while consumers and real estate professionals are concerned about affordability in the housing market, the FOMC’s goal is getting inflation to its target of 2% at maximum employment levels.
ADDITIONAL REMARKS ABOUT HOUSING
During two other responses to questions, Powell briefly mentioned housing. One came at 21:14, when Wall Street Journal correspondent Nick Timiraos asked the following:
“Is the FOMC focused on targeting a real level of policy restriction, and can you explain what would constitute enough evidence that will allow the FOMC to normalize the nominal stanza policy while keeping real policy settings sufficiently restrictive?”
In his response, Powell stated the following:
“Yes, we we understand that it’s a real rate that will matter and it needs to be sufficiently restrictive. And again, I would say you know sufficiently restrictive only when you see it. It’s not something you can arrive at with confidence in a model or in various estimates. And so what are we seeing, through a combination of the unwinding of the pandemic-related demand and supply distortions and monetary policies work in suppressing demand or alleviating very high demand—the combination of those two things is actually working.
“You’re seeing you know, inflation coming down. It’s principally now in goods, also in housing services. You begin to see effects of it in non-housing services as well. So I think, we think, that that is working. As we’ve said, we want to reach…something that we’re confident in… I think confidence comes from seeing you know enough data that you feel like…we can for now decide that this is the right level and just agree to stay here. We’re not permanently deciding not to go higher, but let’s say if we get to that level and then the question is, how long do you stay at that level? And that’s a whole other set of questions. For now, the question is trying to find that level where we think we can stay there, and we haven’t gotten to a point of confidence about that yet.” Jerome Powell – Federal Reserve Chair
At 33:58, Michael McKee from Bloomberg TV, noted the changes in FOMC forecasts over the past few months. He asked,
“Given all the known/unknowns that you face, how much confidence do you have, can investors have, or the American people have in your forecasts?”
Powell responded,
“Well, forecasts are highly uncertain. Forecasting is very difficult forecasters are a humble lot with much to be humble about. But to get to your question though, what’s happened is growth has come in stronger than expected, and that’s required higher rates. Unemployment, you know, you also see that the ultimate unemployment rate is not as high, but that’s really because of what we’ve been seeing in the labor market. We’ve seen more and more progress in the labor market without seeing significantly higher unemployment, so we’re continuing that trend.
“In terms of inflation, you are seeing the last three readings are very, very good readings. It’s only three readings, we’re well aware that we need to see more than three readings. But if you look at June July and August you’re looking at really significant declines in core inflation, largely in the goods sector, also to some extent in housing services, and just a little in non-housing services. Those are the three buckets headline inflation of course has come way down, largely due to lower energy prices some of which is now reversing.
“I think people should know that that economic forecasting is very difficult, and these are highly uncertain forecasts, but these are our forecasts…we have very high-quality people working on these forecasts, and I think they stand up well against other forecasters but just the nature of the businesses, the economy is very difficult to forecast.” Jerome Powell – Federal Reserve Chair
Posted by Vanessa Bowman | Sep 21, 2023 | Housing Market
Key Details:
- During this week’s FOMC press conference, Jerome Powell announced the Fed’s decision to pause rate hikes.
- Powell spoke about housing five times throughout the press conference—including responses to two direct questions about the housing market.
https://nowbam.com/jerome-powell-on-housing-supply-and-the-lock-in-effect/
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