The U.S. housing sector may already be cooling but it should maintain its lofty level and not undermine the economic expansion, St. Louis Federal Reserve Bank President William Poole said on Wednesday.
“My hunch ... is that housing activity will stabilize and remain at a high level this year,” Poole told the St. Louis Regional Chamber and Growth Association over breakfast.
This confidence was drawn from the solid growth of the U.S. economy, which will help consumers make up for spending power they have lost through rising energy prices.
“I base this forecast on the belief that the FOMC (the policy-setting Federal Open Market Committee) will keep underlying inflation low and stable, and that the growth of real household income will recover nicely due to the waning influence of last year’s spike in energy prices.
“Continued healthy job growth will also help keep housing conditions at a high level,” he said.
Poole, who is not a voting member of the FOMC this year, said rising inventories of unsold U.S. houses signaled a slowdown may already be underway.
Some economists have forecast a downturn in the housing sector will sap consumer spending, which has been driving U.S. growth since a shallow recession in 2001.
They argue that homeowners have extracted equity from now more valuable homes to support spending despite, weak income growth in recent years. But Poole dismissed this concern.
“The marginal contribution to the pace of consumer spending stemming from the wealth effect — that is, from households extracting a portion of their home equity to spend on goods and services — is not likely to be a significant concern.”
“The reason is that other economy-wide developments, especially income and employment growth, typically exert a much greater influence on the consumer’s pocketbook and spending habits than does the state of the housing industry,’ he said.
Healthy outlook
Poole also sounded relaxed about the wider outlook for the U.S. economy, noting the expansion was solid and market predictions for higher inflation under control.
“My view is that expectations are quite well anchored ... I believe that there is more risk on the upside because I think that it is easier to imagine in today’s economy, that we would have upward pressures on prices that might spill over to expectations, than downward pressures. We have a strong economy worldwide,” he told reporters after the speech.
“But I don’t want to overemphasize that point. I’m trying to keep it in balance, because I think our environment is strong and stable, not fragile.
“The outlook is very positive for inflation staying about where it is and continued real growth. It is hard to imagine, given how much change there is in the world, the outlook could be more stable and healthier than it is right now,” he said.
Poole did say there was some evidence the housing market might be experiencing some sort of slowdown after its strong gains in recent years. But he explained this was already factored into the U.S. central bank’s thinking.
“As noted in the minutes of the FOMC meeting held on January 31, 2006, policy-makers are expecting some weakening in housing construction,” Poole said.
And he played down worries of wider disruption from the bursting of a housing bubble, which he did not believe existed at a national level, though some markets may have overheated:
"Housing price bubble does not exist"
“The conventional view, which I subscribe to, is that a housing price bubble does not exist on a national average basis, but there may be pockets ... where prices have risen beyond levels that can be justified by economic fundamentals.”
Poole repeated the Fed’s long-standing mantra that it was not possible for policy-makers to identify bubbles in advance, an argument they use to justify not intervening to curb price rises in any asset market.
“Given that bubbles always burst — if there is no burst, then there was no bubble — clear advance evidence of a bubble can never exist.
“If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place.”
He also said a downturn in one region ought not to spread to the country’s housing market as a whole — an important consideration given the lofty prices in some areas.
“I think these things are pretty local,” he said, noting he doubted a decline in the Phoenix property market would be felt much in St. Louis, where prices have risen far less.