Powell: Once mortgage rates 'normalize' we’ll still be left with a housing shortage

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Speaking before the Senate Banking Committee on Thursday, Federal Reserve Chair Jerome Powell twice made the point that he believes the U.S. housing market is undersupplied and will remain so for years to come.

U.S. Senator Jon Tester of Montana asked Powell for his take on the U.S. housing market.

Powell told him that: “There are two big things going on. One is we have this big underlying shortage of housing and it’s due to things like difficulties in zoning… it’s more difficult [for builders] to get people [labor] and materials. Then there are a ton of things happening because of the pandemic and because of inflation, because of higher rates, and those in the short-term are weighing on the housing market. But as [mortgage] rates come down, and that all goes through the economy, we’re still going to be back to a place where we don’t have enough housing.”

Later in the hearing U.S. Senator Raphael Warnock of Georgia asked Powell if he was “concerned about this interplay of low demand yet stubbornly higher [housing] prices and what it means for folks trying to buy a home? And what do you think is driving these high [housing] prices?”

Powell responded saying: “The housing market is in a very challenging situation right now. You have this longer run housing shortage, but at the same time, you have a bunch of things that have to do with the pandemic and inflation and our [The Fed’s] response with higher rates. You have a shortage of homes available for sale because many people are living in homes with a very low mortgage rate and can’t afford to refinance, so they’re not moving, which means the supply of regular existing homes that are for sale is historically low and a very low transaction rate. That [all] actually pushes up the prices of other existing homes and also of new homes because there’s just not enough supply. The builders are pushing, but they’re running into all kinds of supply issues still around zoning and workers and things like that… I will say the first problem is a longer run problem. The other problems associated with low rate mortgage [lock-in] and high [mortgage] rates and all that, those will abate as the economy normalizes and as rates normalize. But we’ll still be left with a housing market nationally, where there is a housing shortage.”

Powell was also asked by U.S. Senator Cortez Masto of Nevada to give an assessment of the office sector and how it could impact banks.

“There are very very few [office] transactions in commercial real estate right now, especially in the troubled areas. So it is not a question of prices still falling, it's a question that you don’t have that kind of price discovery, you just have to assume that prices are very low and gone down a lot. In commercial real estate, we have a secular change in people working from home. That is one big part of it that means in many cities the downtown office district is underpopulated, there are empty buildings in many major and minor cities. It also means all the retail that was there to service the thousands and thousands of people who worked in those buildings are under pressure too. And banks will have made loans to many of those buildings, not all of them but many of them. This we have known for some years. And so what do we do? We [The Fed] have identified the banks that have high commercial real estate concentration, particularly office and retail and other ones that have been affected. We identify them and we are in dialogue with them, ‘do you have enough capital, do you have enough liquidity, do you have a plan, you’re going to take losses here. And you are being truthful with yourself and your owners.’ And so we’ve been working with them. For some time we’ve been doing that,” Powell said.

Powell added that: “This [commercial real estate trouble] is a problem we’ll be working on for years more I'm sure. And there will be more bank failures. But this is not the big banks… it’s more small and medium sized banks that have these issues.”

On Thursday, Bloomberg reporter Patrick Clark reported that Miami-based BGO, a real estate manager majority owned by Sun Life Financial Inc., will partner with 1Sharpe Capital to commit $500 million to an effort to purchase communities of single-family rental homes directly from homebuilders.

This build-for-rent investment comes just one month after we learned that Pretium raised $1 billion to acquire single-family rental homes from homebuilders.

While these two announcements don't signify a return of the pandemic-era institutional bull rush, they do demonstrate that build-for-rent as an investment class is here to stay.

On Thursday, the White House proposed a $10,000 tax credit for first-time homebuyers and home sellers.

How the two credits would work, according to the White House:

1. “Middle-class” first-time homebuyers would get an annual tax credit of $5,000 a year for two years. The White House didn’t specify what “middle class” means.

2. A one-year tax credit of up to $10,000 to “middle-class families who sell their starter home, defined as homes below the area median home price in the county, to another owner-occupant.”

To take effect, the proposal would require Congressional approval. As of today, neither Democratic nor Republican leadership in the House or Senate has come out to support the measure.