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Blame for high home prices? Fed Chair Powell says 'there hasn't been enough housing built'

Powell says the Fed isn’t directly 'targeting' home prices

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Speaking to reporters on Wednesday, Fed Chair Jerome Powell said that while the central bank is pleased with the progress on the inflation front, committee members aren’t quite ready to start the rate-cutting cycle. Powell mentioned that if the job market weakens faster than expected, they are likely to cut rates sooner. On the other hand, if inflation proves stickier, they will wait longer, he added.

During the presser, Nancy Marshall with Marketplace asked Powell, “how closely are you watching rent and housing prices as you elevate whether and when to cut rates? And it seems like housing prices are not coming down as quickly as you expected.”

Standing at the podium, Powell responded [to hear yourself go to the 42-minute mark], saying that the Fed isn’t directly “targeting” home prices and insinuated that the fact “there hasn’t been enough housing built” is the real culprit for elevated home prices.

Powell’s full response: “Our statutory goals are maximum employment and price stability. And that’s what we’re targeting. We’re not targeting housing price inflation, the cost of housing, or any of those things. Those are very important things for people’s lives, but those are not the things we’re targeting. We’re also well aware that when we cut rates at the beginning of the pandemic, for example, the housing industry was helped more than any other industry. And when we raise rates, the housing industry can be hurt because it’s a very rate sensitive sector. On top of that we have longer run problems with the availability of housing, we have a built up set of cities, and people are moving further and further out, so there hasn’t been enough housing built. And are not things we have any tools to address. Where it [housing] comes into play very specifically in our work is inflation, which is really rental inflation. You’re taking owner equivalent rents and then actual rent paid by tenants and running it through the CPI calculation or PCI calculation, the one we look at, and what that’s telling you is that market rents are increasing at a much lower rate or even being flat and that will show up in inflation over time.”

Through the course of the rate-hiking cycle, Powell's perspective on where he thought home prices would head has been, well, hard to nail down.

Below is some of Powell’s post-pandemic housing commentary:

Back in June 2022, Powell told reporters that: "I'd say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again… We are well aware that mortgage rates have moved up a lot. And you are seeing a changing housing market. We are watching it to see what will happen. How much will it really affect residential investment? Not really sure. How much will it affect housing prices? Not really sure."

In September 2022, Powell was asked to clarify what he meant by reset. He responded, saying: "when I say reset, I'm not looking at a particular specific set of data… we probably in the housing market have to go through a correction to get back [to a balanced housing market].” He added that a "difficult [housing correction]" had already started; however, “housing credit was much more carefully managed by the lenders. It's a very different situation [than 2008], it doesn't present potential, [well] it doesn't appear to present financial stability issues.”

In November 2022, as home prices began to fall in most markets, Powell went a step further, saying a "housing bubble" had formed during the pandemic and "the housing market will go through the other side of that." He added that, “none of this [mortgage-rate induced correction] affects the longer run issue, which is that we got a built-up country, and it's hard to get zoning and hard to get housing built in sufficient quantities to meet the public's demand… There's a longer run housing shortage."

Then in June 2023, amid last year’s rebound in national home prices and new home sales, Powell said: "We now see housing putting in a bottom, and maybe moving up a bit. We're watching that situation carefully. I do think we'll see rents and house prices filtering into housing services inflation, and I don't see them coming up quickly. I see them wandering around at a low level."

On Tuesday, the Case-Shiller Home Price Index published its November reading.

National single-family home prices, as measured by Case-Shiller, are up +5.1% on a year-over-year basis—and up +6.6% since hitting the bottom in January 2023. U.S. home prices did soften last fall, with prices falling -0.2% month-over-month in November; however, that’s the seasonally soft window of the year.

Zoomed out, U.S. home prices are up +45.0% since March 2020.