Are US house prices facing a boom and then bust?

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by Shaun Richards

This morning has brought a curious intervention from the President of the Boston Federal Reserve. Eric Rosengren has been interviewed by the Financial Times and gets straight to it.

A senior Federal Reserve official has warned that the United States cannot afford a “boom-and-bust cycle” in the housing market that would threaten financial stability, referring to growing concern about the central bank’s rising property prices.

The curious bit starts with the boom element which seems pretty clear from the development of house prices so far this year.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 13.2% annual gain in March, up from 12.0% in the previous month. The 10-City Composite annual increase came in at 12.8%, up from 11.7% in the previous month. The 20-City Composite posted a 13.3% year-over-year gain, up from 12.0% in the previous month.

I guess he must be grateful that Boston is not one of the leaders of the pack.

Phoenix, San Diego, and Seattle reported the highest year-over-year gains among the 20 cities in
March. Phoenix led the way with a 20.0% year-over-year price increase, followed by San Diego with a
19.1% increase and Seattle with a 18.3% increase.

Although with prices rising at an annual rate of 14.9% it is above the average. Also we see that the monthly rate of increase is on a bit of a charge.

Before seasonal adjustment, the U.S. National Index posted a 2.0% month-over-month increase, while
the 10-City and 20-City Composites both posted increases of 2.0% and 2.2% respectively in March.

Also these moves are very large in historical terms.

“More than 30 years of S&P CoreLogic Case-Shiller data put these results into historical context. The
National Composite’s 13.2% gain was last exceeded more than 15 years ago in December 2005, and
lies very comfortably in the top decile of historical performance. The unusual strength is reflected
across all 20 cities.

So this is unequivocally a boom so in that sense we are half way there.

What else did he say?

He raised a dangerous issue from the Fed’s point of view.

“It’s very important for us to get back to the 2 percent inflation target, but the goal is for that to be sustainable,” Eric Rosengren, president of the Boston Federal Reserve, told the Financial Times. And for that to be sustainable, we can’t have a boom and bust cycle in something like real estate..

The reason why it is dangerous is that real estate is not in the inflation target the much more friendly owners equivalent rent of residencies is instead and it is growing at an annual rate of 2.1% and has been rising at a monthly rate of 0.2% to 0.3%. So very different to the house prices it is supposed to proxy and of course it does not exist and is never paid. So they are at risk of being accused of making the numbers up because in this instance they have and at 23.8% of the index by weight it is a significant amount.

Rather curiously for the FT which is a vociferous supporter of the rental equivalence above it puts the boot into it via the number below.

According to data from the National Association of Realtors last week, the median price of existing home sales rose 23.6 percent year on year in May, topping $350,000 for the first time.

Even Rosengren himself cannot dodge the flying bullets.

Rosengren said that in the Boston real estate market, it has become common for cash-only buyers to prevail in bidding competitions, and that some have refused home inspections to gain an advantage with sellers.

It is kind of him to make my point for me because the more cash-only buyers there are the more my case that house prices should be in the inflation index gets strengthened.

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It is hard not to have a wry smile as we note he is not bothered much about the poor buyers who may be over paying but instead focuses his concern on the precious.

“You don’t want a lot of glut in the housing market,” Rosengren said. “I would just highlight that boom and bust cycles in the real estate market have occurred in the United States many times, and around the world, often as a source of financial stability concerns.”

A Problem

This comes from Fed policy which has been at the minimum house price friendly. The most explicit form of this is below and the emphasis is mine.

 In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

The Fed has been chomping away on these and now owns some US $2.35 trillion dollars worth. Even in these inflated times that is a lot of money and as to its effect let me take you back to January 2009 and the then Chair Ben Bernanke.

 Notably, mortgage rates dropped significantly on the announcement of this program and have fallen further since it went into operation.  Lower mortgage rates should support the housing sector.

That is as near as we will get to an official admission that the plan was to sing along with Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

These days the official Fed statement is much more euphemistic and circumspect.

These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Taper Talk

We remain in the dance where they are talking about possibly doing something at some unspecified date.

Federal Reserve officials are now beginning to discuss reducing bond purchases. “When appropriate” to begin that process, Rosengren said, purchases of mortgage-backed securities should be reduced at the same rate as Treasury purchases. This means that direct support for housing finance will end more quickly.

“This means that we will stop buying MBS before we stop buying Treasuries,” he said.

So he would reduce the programmes dollar for dollar which adds another level to this as rather than simply stopping purchases he would start to turn the tap off. So this saga seems set to run and run which is revealing. Maybe we might reach the end of the beginning this year.

Given the rapid recovery, Rosengren said, “It is likely that the conditions to consider whether we have made more substantive progress before the start of next year will be met.”

We finish with that central banking standard of the two-handed economist.

“There is a great deal of uncertainty in the forecast,” Rosengren said. Some people will grow very fast [and] The terms of the tightening policy may apply sooner. And other people will think the recovery will be a little slower.”


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This is what you call a hot potato. The US Federal Reserve threw everything it had at the US housing market in March 2020 and is now being forced to at least acknowledge the consequences. It can no longer get away with only pointing to claimed wealth effects as many see this.

U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades. Many Americans of all stripes paid off credit-card debt, saved more and refinanced into cheaper mortgages. That challenged the conventions of previous economic downturns. In 2008, for example, U.S. households lost $8 trillion.

Through this lens.

More than 70% of the increase in household wealth went to the top 20% of income earners. About a third went to the top 1%……..The Americans who gained the most during 2020 were the ones who had much more wealth to begin with. Houses, stocks and retirement accounts—which wealthier people are more likely to own—soared in value, and those boosts are likely to endure.

From that we can answer my question at the top of this piece. We have yes to the boom but the Federal Reserve response to any bust will be “over my dead body” which means that they have made the same mistake as they did in the credit crunch.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby ( Elvis Presley)


A different tack this week as I was interviewed by Jana Hlistova for The Purse Podcast.

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