Fed’s Rosengren on Housing Market: “The U.S. Cannot Afford Boom and Bust Cycle”

Published on

Eric Rosengren, the president of the Boston Fed, warned that the U.S. “cannot afford a boom and bust cycle” in the housing market as it would jeopardize financial stability. According to National Association of Realtors data, the average price for sales of existing homes grew 23.6% year-on-year in May, reaching $350,000 for the first time.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q1 2021 hedge fund letters, conferences and more

Less exuberance in the housing market

During an interview with the Financial Times, Rosengren asserted: “You don’t want too much exuberance in the housing market.”

“I would just highlight that boom and bust cycles in the real estate market have occurred in the United States multiple times, and around the world, and frequently as a source of financial stability concerns,” he added.

During the exchange, Rosengren emphasized the importance to return to the U.S.’s 2% inflation target in sustainable fashion. And to reach such a goal in time, a “boom and bust cycle” in real estate is the last thing the country needs.

“I’m not predicting that we’ll necessarily have a bust. But I do think it’s worth paying close attention to what’s happening in the housing market,” he said.

According to Rosengren, it became customary in the Boston real estate market that cash-only buyers would have the advantage in bidding contests, and that “some have been declining home inspections to gain an edge with sellers.”

Rosengren's comments arrive nearly a week later when Mad Money host Jim Cramer said, “I don’t want to repeat the mistakes that led to the financial crisis. Unlike the lead-up to the great recession, homebuyers are actually solvent right now with excellent credit and strong stock portfolios.”

Housing market and bond buying cut

While the central bank is weighing both the deaccelerating or withdrawal of some of the substantial monetary support during the COVID-19 pandemic, Rosengren stated that the blazing housing market should be added into the equation.

With the implementation of its asset purchase program, the Fed has been acquiring every month up to $40 billion in agency mortgage-backed securities as well as $80 billion in Treasury debt. Now, with the current outlook, Fed officials have considered cutting back on bond buying.

In this regard, Rosengren asserts that, when the right time arrives to start this process, “mortgage-backed securities purchases should be reduced at the same rate as Treasury purchases. That would mean the direct support to housing finance would wind down more quickly.”

“That would imply that we would stop purchasing MBS well before we stopped purchasing Treasury securities,” he added.