The release of the December 14 Fed minutes gave us some important clues as to what the Fed thinks of the current run-up in house prices:
“The steep run-up in housing prices, recent increases in equity prices, and anticipated gains in payrolls were viewed as likely to boost the growth of consumption spending next year to a pace somewhat above that recorded this year...
Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets evidenced by quite narrow credit spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums.”
Forgive me for getting hung up on adjectives, but these are important. Certain committee members have, for the first time, referenced reports suggesting the possibility that “speculative demand” is contributing to home price appreciation – implying that the Fed is cognizant of the massive run-up in home prices due in part to over-accommodative policy. Although the Fed probably views the housing market as short of being an outright bubble, it is aware of the problems such elevated prices present. As a major surrogate to income from wage growth, home prices and income from home price appreciation are far too important to be shocked into remission. The Fed realizes this and would prefer that remission be governed by the Fed than that of the market.
The Fed is starting to take a more proactive approach on the state of the housing market – and not a moment too soon. Better to douse a hot market with cold water while prices are still manageable. Market participants should realize the importance in the Fed’s statement regarding “speculative demand.” The Fed is subtly sowing the seeds for a policy induced slowdown in the housing market.
--UK
Comments