3 Possible Solutions To Housing Booms And Busts
Abstract
Is there a sector of the economy that is more sensitive to changes in interest rates than buying houses? When you borrow 95% of the price of the largest purchase of your life for 30 years, interest rates have a huge impact on how much you can pay for a house and on house prices in general. After house prices had been skyrocketing for a while, both investors and live-in home buyers expected prices to continue skyrocketing so they continued to bid up house prices long after mortgage rates stopped falling. Federal Reserve "Stable Prices" Mandate Isn't it ironic that the Fed's mandate is "Stable prices" but the Fed is the biggest destabilizer of house prices? The Fed says housing costs are by far the largest component of consumer spending but the Fed doesn't include house prices in its inflation calculation, it only includes rents! When they calculate inflation, the Fed doesn't consider the price inflation of the most expensive thing you'll ever buy in your life, your house. Can we update the Fed's mandate to be, "Stable prices, including house prices" and let the Fed figure out how to reach the goal? In the past the Fed has not been interested, at all, in stabilizing house prices. Set The Goal: New "Central Housing Bank" A better solution might be to create a "Fed" for house prices since the Fed doesn't cover house prices. If house prices stop increasing as seems likely given current high prices and future demographic trends, the top source of family housing wealth for younger generations will come from paying off their mortgages, not from house price appreciation. Set The Goal: Sustainable House Price Increases And No Decreases Whether we change the Fed mandate or create a new Central Housing Bank, or neither-one way or another, top goals of U.S. government policy should be to have sustainable house price increases and no price decreases, and to maximize free-and-clear home ownership.