Are there misconceptions about the U.S. housing market? Is it all bad news ahead?
At this point there isn't much of a silver lining in the housing market that I see quite yet. A big unknown is the trajectory of the overall economy. If the Fed is unable to engineer a so-called soft landing, I think the housing market could suffer further deterioration in the short-term if unemployment were to rise sharply. If inflationary pressures persist in the economy, the real potential long-term is for a long period of slow growth and higher than normal inflation (stagflation) to take root. Prospective homebuyers, particularly first-time homebuyers and low-and moderate-income households will be challenged by housing affordability issues brought on by higher construction costs and wages that are unable to keep pace with inflation.
What other factors are driving the housing market? You said in July, for example, that bank stress tests could lead to the reduced availability of credit to prospective homeowners.
Some of the effects of the pandemic are still with us. Supply chains that unraveled during the pandemic are starting to come back but slowly and this coupled with rising costs of key commodities and goods for building, remodeling and furnishing homes leads to higher prices. With wages not keeping up with inflation, that reduces borrower purchasing power and when coupled with the double whammy of higher mortgage rates dampens housing demand. All of these factors are contributing to abnormal housing market conditions that were already affected by low housing inventory levels.
You might have a good perspective on this from your experience in senior risk management positions at Freddie Mac and Fannie Mae. Does anything need to be done with the GSEs to improve the mortgage marketplace? Would reforms hurt or help the industry and consumers?
The one thing the GSEs and government agencies such as FHA should not do is significantly relax credit underwriting guidelines in an effort to spur market demand. I've seen this movie before and it never ends well. Prior to 2008, efforts to provide products such as option ARMs were heralded as affordability products that should never have been provided at scale to the general public. Mortgage product creativity can be beneficial at times, but also wind up causing significant pain if not carefully developed. These agencies need to assess their appetite for mortgage credit risk and maintain that level while providing access to credit during this period.
What can be done to improve the rental market in the United States? Does anything need to be done? Is it beyond government intervention?
The rental market is a reflection of the state of housing generally and as such presents a real problem in the market today. Unfortunately, I think in the short-term rental market conditions will remain painfully elevated. The combination of high home prices, low rental housing inventory and a large presence of institutional investors in the housing market have helped distort rental prices over the last several years. Unfortunately, a period of historically low interest rates and excessively and unnecessarily stimulative fiscal policy contributed to the formation of significant increases in asset prices in many markets over the last few years including equities, fixed-income, real estate and commodities. High inflation and the corresponding low response by the Federal Reserve are forcing a day of reckoning on these markets. The Fed's course toward stamping out inflation is an unfortunate but necessary path though toward long-term economic and housing market stability.
Clifford Rossi, professor of the practice and executive-in-residence for University of Maryland’s Smith’s Center for Financial Policy, has held senior executive roles in risk management at several of the largest financial services companies. His most recent position was managing director and chief risk officer for Citigroup’s Consumer Lending Group, where he oversaw a global portfolio of mortgage, home equity, student loans and auto loans worth over $300 billion.
