Fed’s Waller says inflation measures risk understating housing costs

Andrew Harrer/Bloomberg

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.

“Demand for living in cities with high-paying jobs and many urban amenities has surged, pushing up housing costs in these areas,” Waller said. “Among metro areas in the top quartile of local housing demand, population increased 80%, and single family home prices rose more than 110% from 1990 to 2019 after adjusting for inflation.”

The Fed governor said that both fiscal and monetary policy also helped support housing prices. The Fed’s purchases of agency mortgage-backed securities lowered home loan costs by about 40 basis points, he estimated.

Waller said that unlike the early 2000s, the home price boom wasn’t being driven by loose lending standards and excessive leverage.

“I am hopeful that at least some of the pandemic-specific factors pushing up home prices and rents could begin to ease in the next year or so,” he said.