Rising rents and mortgage payments have been at the center of the
inflation discussion. Our Global Chief Economist assesses whether
monetary policy can effectively blunt those figures.
----- Transcript -----
Seth Carpenter: Welcome to Thoughts on the
Market. I'm Seth Carpenter, Morgan Stanley's Global Chief
Economist. Along with my colleagues bringing you a variety of
perspectives, today I'll be talking about the housing market,
inflation, growth and monetary policy.
It's Monday, July 1st, at 11am in New York.
Housing is at the center of many macro debates from growth to
inflation. And when you put those two together – monetary policy.
House prices have continued to rise despite high interest rates,
which gives the impression to some of stalled deflation and
forces consumers at times to make some really difficult choices.
And in some economies, there's a seeming lack of responsiveness
of housing to higher interest rates. All of which tends to prompt
questions about the efficacy of monetary policy.
So where are we? We think monetary policy is still working
through housing as it usually does, but supply shortages, or in
some places just idiosyncratic factors like buildable lands or
permitting, that's supported home prices. And as has been the
case across several sectors in this business cycle, there really
are some factors about housing that's just different in this
cycle than in previous ones. For the U.S., a key part of the
housing story has been the mortgage lock in for homeowners. Our
strategists have noted that the gap between the current new
mortgage rate and the average effective mortgage rate is at
historical highs. And the share of 30 year fixed rate mortgages
is at its highest in a decade.
Consequently, the inventory of existing houses has remained low
because homeowners who have those really low mortgages are
reluctant to move unless they have to. The market has become
thinner with less available supply; and then if we think more
broadly for the economy, there's a risk of labor market frictions
if that mortgage lock in also reduces labor mobility.
Now, there will be a decline in mortgage rates if we get the
modest easing cycle from the Fed that we expect. But that decline
will be similarly modest so that gap in rates will not be fully
closed even if it narrows. And so there might be some uplift to
supply of housing, but it might not be huge. That decline in
mortgage rates can also supply demand, so then we have to think
about the net of this shift in demand and the shift in supply.
And ultimately what we think is going to happen is that there'll
be a moderation in home price appreciation, but not an outright
decline in home prices.
First, the choice of housing for a lot of households is do you
buy or do you rent? If you've got high home prices and high
mortgages, buying is much less affordable and so it pushes people
into renting, which could push up rents. That phenomenon is
partly responsible for the surge in rents that we've seen over
the past few years.
In the longer run, there should be a sort of arbitrage condition
between home prices and rents. And while rising home prices can
impinge the spending power for first time homebuyers, rising
house prices can actually boost sentiment and consumption for
existing homeowners.
And that mortgage lock in that I talked about before? Well, that
can actually support aggregate consumption to some degree because
now there's predictability of cash flows and the monthly payment
is pretty low.
So what do we do when we take all of this together? The housing
market might be telling us that monetary policy is working a bit
less effectively than historically, but not that monetary policy
is not working.
Home price appreciation is moderating. Housing starts have
slowed, as usual, following those big rate increases. But that
slowing? It's actually been a bit inconsistent because mortgage
lock has meant that new supply is the only supply. Existing home
sales, by contrast, are just plain weak. They're about as weak as
they were around the financial crisis.
We do not think the housing market overall is at risk of
collapse, but monetary policy is restraining activity in a very
familiar way.
Thanks for listening, and if you enjoy this podcast, please leave
us a review wherever you listen and share Thoughts on the Market
with a friend or colleague today.
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