Fed Watching Red-Hot Housing Market for Financial Stability Risks

Source: American Banker (Subscription may be required.)

It’s beginning to look a lot like 2007 in the U.S. housing market, and the Federal Reserve Board has taken notice.

Home prices, the number of first-time buyers and the share of properties being bought as nonprimary residences are all at or near the cyclical highs of the mid-2000s housing bubble, Fed. Gov. Christopher Waller said during a Thursday webinar. He called the growth in the housing market a “singular feature of the U.S. expansion since the COVID-19 recession.”

“An important question I will keep my eye on is whether the sharp and ongoing increase in home prices poses risks to financial stability,” Waller said.

The market of today is different from 2007 in some key ways, he said. Underwriting standards are tighter, leverage use is moderate, and there is less speculation from builders and investors. Also, borrowers are, overall, on steadier footing financially and the banking system is well prepared for a sudden drop in prices.

Waller said the housing market likely doesn’t pose an imminent threat to financial stability. Yet, while banks are well prepared for a shock, with a variety of liquidity sources at their disposal, those fallbacks are not available to the various nonbank lenders and servicers that have entered the market during the past 15 years, Waller noted. 

A wave of refinancing activity kept many nonbank lenders solvent during the pandemic recession, as did a credit facility provided by Ginnie Mae. But moving forward, Waller said, steps must be taken to bolster those entities against future housing market downturns.