by John Carney and Alex Marlow
Americans just bought a near record number of new homes in what has been called the most unaffordable housing market in decades.
The Commerce Department reported new homes sales hit a seasonally-adjusted, annualized rate of 759,000 in September, a 12.3 percent rise over the August pace and a jaw-dropping 33.9 percent increase from a year ago. Economists had been expecting a milder increase of around 10,000 homes to a pace of 685,000.
Builders of new homes have benefited from the limited inventory in the market for existing homes. New home sales have been on the rise for nearly a year now after hitting the bottom of the recent cycle in the summer of 2022.
Economists keep expecting that higher interest rates and higher prices will weigh down sales. Yet the appetite for homes remains unquenched.
To get an understanding of just how high home sales levels are right now, it’s helpful to look back beyond the pandemic. Home sales in the prepandemic decade exceeded the current pace only in one signal month. Even if sales decline from here, they will still be at high levels historically.
This has implications for more than just the housing market. New homes are important drivers of economic activity. Building homes employs labor from across the spectrum of skills and experience. New homes are outfitted with new appliances and furniture. The residents become important drivers of demand for goods and services into the areas where the homes are built.
Housing is supposed to be the part of the economy that is most responsive to the monetary policy of the Federal Reserve, in large part because home purchases are typically financed with mortgages. Mortgage rates are closely linked to 10-year Treasury yields, which are themselves largely based on expectations of Federal Reserve policy over time.
New home sales appear to have bottomed in the middle of 2022. That should cause Fed officials to question whether they are right to assume that the effects of earlier monetary policy really are still working their way through the economy. From the perspective of home builders and buyers of new homes, there does not seem to be much of a drag from higher rates at all.
A Derelict Fiscal Policy
Does America need a fiscal cop on the beat?
The surge in the budget deficit in the recently ended fiscal year 2023 demonstrated that despite debt ceiling brinksmanship, government shutdowns over budgets, and a gridlocked government, the federal government fiscal policy is basically derelict. The deficit ran up to 7.5 percent of gross domestic product—a record outside of war or emergency—almost by accident, as if we had lit the kitchen on fire by forgetting to take the kettle off the stove.
There’s little room for doubt about the damage our fiscal conflagration has caused. While economists will no doubt debate for decades the causes of inflation’s rise, it is becoming increasingly apparent that inflation is being sustained by fiscal imbalance.
Is it possible that the Federal Reserve could step in to provide some much needed oversight?
Greg Ip of the Wall Street Journal does not hold out much hope that Jerome Powell or his fellow Fed officials are willing to don the badge of fiscal sheriff.
Federal Reserve officials say soaring long-term bond yields are a key factor in the economic outlook and their interest-rate decisions. They also say the swelling federal deficit is one reason yields are rising.
What they won’t say is that political leaders should therefore do something about the deficit.
“We don’t comment on fiscal policy,” Fed Chair Jerome Powell told a questioner after a speech last week. “We know that we’re on an unsustainable path fiscally.”
Ip points out that Powell had a lot to say about fiscal policy when the pandemic struck. Back then, Powell eagerly urged Congress to “use the great fiscal power of the United States to do what we can to support the economy.”
In fact, the notion that the Fed should take a stand on fiscal policy has an even longer and more prestigious pedigree. Back in 1993, Fed chairman Alan Greenspan more or less endorsed the economic policies put forth by the newly elected President Bill Clinton in his February address to a joint session of Congress. Driving home the point, Greenspan actually sat next to Hillary Clinton during the address.
Later that week, Greenspan testified to Congress on the state of the economy and monetary policy.
“It is a serious proposal, its baseline economic assumptions are plausible, and it is a detailed program-by-program set of recommendations as distinct from general goals,” Greenspan told the Senate Banking Committee when asked about Clinton’s economic proposals.
The New York Times captured the moment perfectly with its headline: “He Says Federal Reserve Won’t Raise Interest Rates and Choke Recovery: Greenspan Backs Clinton Deficit Plan.“
In written testimony not read to the committee, the Fed chair stated very explicitly: “The Federal Reserve in formulating monetary policy certainly needs to take into account fiscal policy developments.”
The day before his testimony, Greenspan led a conference call with Fed officials to discuss what he would say.
“Good afternoon, everyone, ” Greenspan began. “The purpose of this session is essentially to discuss the response of the Federal Reserve as a whole to the President’s program of last night. Granted, we don’t know terribly much about it. I thought the best way to proceed is to read to you a draft of a possible statement that I might make tomorrow morning to try to capture the point that, basically, our fundamental interest is in the deficit reduction and we don’t have a position–nor should we–on how it is done.”
The entire transcript of the call is contained in the archives kept by the Fed. Perhaps Powell can ask one of the thousands of researchers on the staff of the Fed to retrieve it for him. (Note to the staff: you can just click here.)