Measures Risk Understating Housing Costs

Source: National Mortgage News (Subscription may be required.)

Federal Reserve Governor Christopher Waller said longer-run structural issues will continue to put upward pressure on home prices and rents even as the central bank begins a campaign to raise borrowing costs.

“With housing costs gaining an ever-larger weight in the inflation Americans experience, I will be looking even more closely at real estate to judge the appropriate stance of monetary policy,” Waller said on Thursday in the text of a speech prepared for delivery at a conference on housing. He also suggested that rent costs have been understated by the consumer price index.

“Based on various measures of asking rents, some recent research suggests that the rate of rent inflation in the CPI will double in 2022,” Waller said. “If so, rent as a component of inflation will accelerate, which has implications for monetary policy.” He didn’t comment explicitly on the outlook for interest rates in his prepared remarks.

U.S. central bankers raised the benchmark lending rate in March by 0.25 percentage points and forecast six more rate increases this year. They will also start to reduce their holdings of longer-term Treasuries and mortgage-backed securities in coming months, which could further tighten lending conditions for the U.S. housing market. Sales of new U.S. homes fell in February for a second month, suggesting high prices and rising mortgage rates may be keeping prospective buyers on the sidelines.

Waller said the migration to cities with high-paying jobs has created housing shortages in those areas while “a shortage of skilled workers” and regulations will likely hold back new construction.