Politics & Money

Fed chiefs give the good, bad and ugly on housing and monetary policy

A new generation of Americans may eschew homeownership altogether after witnessing fallout from the housing bubble, said James Bullard, president and CEO of the Federal Reserve Bank of St. Louis

Bullard made that assertion while commenting on a paper titled, “Housing, Monetary Policy, and the Recovery” during the U.S. Monetary Policy Forum under way Friday in New York City. The paper was written by Mike Feroli (JPMorgan Chase), Ethan Harris (Bank of America), Amir Sufi (University of Chicago Booth School of Business), and Ken West (University of Wisconsin). 

Bullard, commenting on the paper’s findings, said a major shift is under way, reshaping the old story of homeownership as the ultimate American dream. 

“The current cohorts of new homebuyers likely see homeownership as a fundamentally riskier proposition than earlier cohorts, and therefore may be more likely to rent than own,” he said. “Such a theory may suggest a more permanent shift to renting.” 

Bullard also warned that Americans with outstanding mortgage debt are weighed down by excessive debt levels. 

Of the 75.3 million American homeowners, 49.4 million had debt outstanding in the most recent third quarter. 

Altogether, these homes had $712 billion of equity to support close to $10 trillion in mortgage debt. 

Meanwhile, the loan-to-value ratio average, which hung around 58% in 1970 and 2005, shot up to 90% during the crisis and remains there, Bullard said. 

He says this dichotomy suggests homeowners who bought in the bubble borrowed in a manner where they never expected the possibility of price declines. 

John Williams, president and CEO of the San Francisco Federal Reserve Bank, commented on the same report, saying that while the housing bubble was a major player in the crisis, it’s not the only major headwind pressuring the economy. 

In fact, Williams said the bubble started to pop after home prices peaked in 2006. By the time, Lehman Brothers collapsed in September 2008, home prices were already down by 20%, but were not the huge drag they eventually became on the economy. 

He says prior to September 2008, “Housing starts had already fallen sharply, but effects on nonhousing indicators were relatively modest.” Williams added, “The stock market, though off its highs, was still about where it had been when home prices peaked. And the economy was bearing the housing crash reasonably well. In many ways, it looked like a replay of the recession following the dot-com bust.”

Williams says Lehman’s crash was a game-changer, sending the markets and investors into a panic. 

Federal debt levels

Besides individual debt, high levels of federal debt are also a concern. Other Federal Reserve players speaking at the conference warned that the central bank and Congress have a tough road ahead due to exceedingly high federal debt levels. 

“In particular, the interest bill on the growing federal debt burden has been temporarily restrained by the low level of interest rates and high level of remittances from the Federal Reserve to the Treasury,” said William Dudley, president and CEO of the Federal Reserve Bank of New York. “In addition, while significant fiscal adjustments must take place, it is important to recognize that such efforts will necessitate offsetting shifts in private domestic spending and production both here and abroad. Finding ways for these adjustments to occur smoothly is an important challenge for economic policy.”

Meanwhile, Charles Plosser, president and CEO of the Federal Reserve Bank of Philadelphia, said the central bank needs to begin drawing a clear line of demarcation between the central bank and lawmakers who influence through political activity.

“Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets or the government to use its balance sheet to substitute for other fiscal decisions,” Plosser warned. “Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline. This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving its mandate.”

Plosser revived a point he introduced three years ago, saying he once argued for an accord between the Treasury Department and central bank that would cut back on the ability of the Fed to lend to private individuals and firms outside of its discount windows. 


3d rendering of a row of luxury townhouses along a street

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