Real Estate Realities: Perspectives on the Housing Market

Charles Gascon: For tonight’s Dialogue with the Fed, I’m Charles Gascon. I’m an economist and a research officer in the Research division here at the Fed, and I analyze national economic conditions and economic conditions here in the St. Louis area. We’re so glad that you could be here this evening. We’ve got a great turnout both here in person and also online.

So for all those joining us virtual, thanks for joining us. The topic tonight is the housing market, which is a topic that’s close to all of us. And after this brief introduction, I’m going to turn things over to Kathleen Navin, and she’s going to give tonight’s presentation.

Following her presentation, I’ll be back up here for a Q&A session, where I’ll ask Kathleen a few questions, as well as our colleague Victoria Gregory, who’s also an economist here in the Research division. A few things before we get started. You will receive an email in the coming days with a link to complete an evaluation for tonight’s event. We take these comments very seriously, so I’d encourage you to provide your thoughts when you receive that email.

During the Q&A session, for those of you who are in person, you’re just going to tap the base of the microphone to speak. Just raise your hand. I’ll call on you. And then make sure you turn on your mic so that the people online will also be able to hear you.

And for those that are joining virtually, you can submit your questions using Slido. It was up, I think, earlier on. It’s also probably on the chat. Go visit slido.com and enter the word “dialogue” into the participant code. Once you submit your questions, they’ll go to staff, and they’ll pass those questions along to us.

And now I’d like to introduce to you our speaker for tonight, Kathleen Navin. Kathleen is a senior business economist in the Supervision division here at the St. Louis Fed. She is responsible for analyzing and presenting economic and banking conditions in the U.S. and regionally. Prior to joining the St. Louis Fed last year, Kathleen held the position of executive director of U.S. economics at S&P Global Market Intelligence.

In this role, she produced analysis on economic data and forecasts related to the U.S. economic outlook and developed alternative macroeconomic scenarios used for bank stress testing. She was previously a research associate at the Federal Reserve Bank of Kansas City, in the macroeconomics and monetary policy division. Kathleen is an active member of the National Association for Business Economists, NABE, and she is currently serving a three-year term on its board of directors. She became a member of NABE’s inaugural class of certified business economists in 2025.

So please join me in welcoming Kathleen.

Kathleen Navin: Thank you, everyone. So tonight, I’m going to be talking about housing. And when I was learning about Dialogue with the Fed, this is my first one, people were telling me, kind of look at what are you seeing in the headlines? What are you seeing in the press and the media? And then how would you address those topics? So obviously, housing is one that we see every day. So, I’m going to walk through some of the big headlines that we see, but also what are the data that I’m looking at and trying to understand what’s going on, underlying those headlines.

Before I get started, just to reiterate, these are my views. So anytime you see a Fed speaker, you’re going to see this slide. These are my views, my views alone, and not those of the Federal Reserve Board System or St. Louis Fed. So, any comments you have, any critiques, they come right to me.

And this was mentioned earlier, but if you have any questions, especially for those online here, in person, you’ll have a chance to ask those afterward, but you can go ahead and submit them there. All right. So tonight, I’m going to talk about a lot of different things related to housing.

So, when I first put this presentation together, I had just a very big run of data. And then Chuck was kind enough to say, put an outline up there. Let’s walk through what are the big pieces that we’re going to talk about. Appreciated that advice. So here we have it.

So essentially, we’re going to be looking at recent trends in home prices across the U.S. So not only what are we seeing nationally, but what are we seeing in the Midwest? What are we seeing in St. Louis specifically? That’s going to bring us to a big part of tonight’s talk, which is housing affordability. What are we seeing because of the home price increases that we’ve had? What are we seeing because of the higher interest rate environment that we’re working in?

Then we’re going to look at home buyer profiles. So, for those that are entering the market at this time, what do they look like? What’s their age? What are their credit scores looking like? Things like that. When you talk about housing these days, especially when we talk about why are prices so high, a lot of it comes back to housing supply. So, we’re going to dig in deeper there.

And then at the end of this, I’m going to connect what we talked about in housing to where we are on inflation right now. A big part of the inflation that still has to move back to a pre-pandemic trend is housing services. And that’s really connected to the first part of this talk. So, we’re going to walk through how that’s measured and how that’s playing into the inflation forecast or inflation picture.

So, let’s start with recent home price trends. The motivational chart that I have for this presentation is this one. So, I saw something very similar to this in one of the economic news outlets that I follow. And I thought, this is the chart. Whenever I go on any social media right now, it’s always these different short videos kind of saying, when my parents bought their home at this time.

There was one I saw that really made me laugh. It was basically, when my parents bought their home back in the early 1980s, this is what it looked like. And it was a U.S. gymnast doing a very nice cartwheel, very elegant, but maybe one or two flips. Then it was like, this is what it’s like when I’m trying to buy a home in 2024. And it was Simone Biles doing a million flips and all of the gymnastics that she does.

So, I thought this is a good starter picture for the environment that we’re thinking about this in. What you see here is that if you go back to 1985, the median household income was a little less than $24,000 a year. The median home price, and this is for a new home, was a little less than $85,000 per year.

Fast forward to 2022, and the reason I’m going to 2022 is based on the data. So, these data come from the Census Bureau. 2023 is not out yet, but we’ll look at some things to see how maybe this has moved since then. But similar story to what we’re going to see today. So, the median household income, it did go up about three times. So, we’re at about a little less than 75,000 as of 2022. When we look at the median new single family home price though, it’s up over five times where it was in 1985 at $430,000.

Now you may look at this and say, OK, well, this is new homes. Well, aren’t homes that are already on the market and maybe they’re going to be resold, wouldn’t those be less expensive? But one of the kind of quirks in the market right now is that if we look at new home prices and existing home prices, while historically it’s true that new home prices trend, they trend very similarly, but they are, level-wise, higher, existing home prices have really jumped over the last couple of years.

And in fact, in the latest month of data, in June, the median existing home in the United States had a higher selling price than the median new home. It’s kind of mind-blowing. And when I looked at average square footage, it was still the case that new homes are bigger than [old] homes. Now we’ll see how this plays out, but, this is one of the things I come back to.

So, we think about 2022. We thought about the very hot housing market we had coming out of the pandemic. We still have high home prices even a few years later and even with higher interest rates. So why is that?

Well, one of the things is that with that home price appreciation, I do want to point out that while the first charts were for the U.S. as a whole, the entire country saw home price appreciation. Now maybe not at the county level, maybe not city by city. But when we look at states, we can track that home price appreciation.

So, what I have here is essentially a map of the U.S., and I’m showing the year over year growth rate in a home price index by state. You see that the legend here. So, if it’s a very, very pale yellow, which actually is not any of these examples, it would be negative growth. The greener it gets, the stronger it gets. And once you get into those dark green colors, you’re getting into double digits.

Now prior to the pandemic, so kind of 2019, go back before any of those shocks that we’re looking at, year over year home price growth in the United States was single digits. So, it can vary depending on what state you’re in. But for the most part, you’re in that 5% to 10% range.

We fast forward to 2020, and you start to see, OK, still in those single digit. So, home prices are appreciating but starting to see a little bit more strength. We get to 2021. You start to see a lot more green. So now we’re seeing a lot more states moving into the higher single digits. And then you see here Arizona, Utah, Idaho moving into those double digits.

Now I don’t have a migration chart tonight, but kind of when I look at this, I can see that you hear the big stories of migration out of California. Kind of start to see it here. Then we go another year into 2022, and we have double digit home price growth across the country.

So, you see here, just very strong. You see it going into Texas, going into Florida. And so, you really start to see that across the country. Now we also know in the first quarter of 2022, what happened. Well, with inflation, as high as it was, the Federal Reserve responded with higher interest rates, starting that tightening cycle to bring inflation back down.

As they did that, and we’ll talk about this later. It’s going to have an effect on the housing market. Housing is very interest sensitive. So, with higher policy rates, you saw higher Treasury security rates, and you see higher mortgage rates. Also, higher borrowing costs.

So, all of that started to put downward pressure on the home price situation in 2023. We see that a pullback from having every state in double digits to a lot more moving back into single digits. And when we look at 2024 Q1, so looking at the first quarter of this year relative to the first quarter of last year, we’re pretty much back into that where most states are showing single digit home price growth.

Now that’s still positive growth. You’re not seeing states with huge home price declines, not unwinding what we saw during that housing activity boom. And that’s been one of the puzzles. Why are home prices still so elevated when we have mortgage rates that are so much higher than they were just a few years ago. So, we’ll dive into that in just a minute.

But I did want to show, given all of this home price growth, well, actually what is a home price these days, so across the country? This is a map from National Association of Realtors. They use home price data from the American Community Survey, and then they use the FHFA data, which was showing in the previous few charts, to look at the changes and kind of basically then come up with the levels as of today. So, we don’t have this written down, but I believe this was also as the first quarter of this year.

Now a lot of counties, we probably know the county we live in. But generally, when I look at this, you see, OK, well, home price levels higher on the West, higher on the East Coast. Midwest, you see a lot more affordability. So that makes sense.

What’s interesting is if I zoom in here, so that kind of orangish color. So that’s St. Charles County, so to give you a sense of where we are showing up. So, I’ll show some of the St. Louis area counties. So, a median home value was 365,000 in St. Charles County. So, falling into kind of that yellow range.

When I look at St. Louis County, you see it’s in that more blue range, but it is at the higher end of that range. So, with the median home value of 321,580. So, you see how all of that home price growth has actually brought home prices much higher than they were in 2019 for our area. These data are all available online, so you could always Google this title and then go and look and click around by county. It is pretty interesting. But I just kind of like to level set with, OK, given all of that growth, what are we looking at?

So that brings us to affordability. Well, when home prices become a lot more expensive, one would think, OK, well, that would make it tougher to buy a new home. But for a lot of Americans, we need to be looking at interest rates. So, while the amount of cash buyers in the economy has gone up, especially over this higher interest rate environment that we’ve seen, it’s still something like 80% are financing their purchase in the last, I think this was the most recent data for the most recent month.

So financing is still important. And so, you have two parts that really go into affordability. You have the price, and then you have what are you borrowing at? And so that brings us to mortgage rates. Here I have the mortgage rate. This is a 30-year fixed in Navy. So, we see the big increase that we’ve had over the last few years, which I feel like we’re very familiar with that.

One thing I like to point out to people is that if you were looking at this and you put up, in top of this, the federal funds rate, so that’s the actual policy tool that the Federal Reserve is using, and you would see that the federal funds rate has been steady at the range of 5 and 1/4 to 5.5% since July of last year.

But what’s going on with the mortgage rate? We see a lot of volatility. We see a big jump up, and then we see some movements down and especially a drop in the most recent week or two of data. Well, it comes down to what’s used to price mortgage rates, and that is primarily something like the 10-year Treasury yield, and that’s a real market rate.

So that’s not just looking at what is the policy rate but also what are expectations around where the policy rate might go? And so, you can see sometimes, if markets are starting to expect that there’s going to be a number of rate cuts, then that could get included in the pricing for the 10-year Treasury and then included in the pricing for mortgage rates. So, we kind of need to think about that in terms of where actually is the mortgage rate day to day.

The other thing I want to point out is just until this most recent episode of higher interest rates, interest rates were on a secular decline downward. And so if we go back to 1985, which was kind of the start of my first chart, you see that mortgage rates were much, much higher than they are today.

And so, in a minute, we’re going to talk about some measures of affordability, and we’ll see that while the change in home prices has been so dramatic, actually, things were tough in that time in 1985, too when we think about affordability.

But staying on today, let’s look at, OK, so now we have prices. We have mortgage rates. So, what does a typical mortgage payment look like in the US? Well, they’ve nearly doubled since 2019. This is as of May of 2024. And so, this is, I think it’s a median, but I maybe need to double check that. But essentially a good sense of a typical monthly mortgage payment. This is your principal and your interest.

So, it was something below 1,200 prior to the pandemic. And now we’re looking at something closer to 2,300. So, when you’re looking at a mortgage on what you’d be going to purchase, you look at the mortgage you’re paying today, a lot of times, that’s a difficult choice to make.

The other thing I might want to include here is that this is given kind of typical mortgage rates that are out there. So, if you think about, OK, well, does this reflect the pricing having-- had the mortgage rate already go up all the way to above 6%, maybe about 6.5%? Well, a lot of the market is actually still priced in at a lower mortgage rate. So that shows that there’s probably even more upward pressure when you’re going to actually look at a new home these days.

Now we know that a typical mortgage payment is not just your principal and your interest, but it also takes into account your insurance. And this is an analysis from Insurify. They had a report that National Association of Realtors referred to, and I found it very interesting. This showed average annual premiums, and this is their projection for the end of this year.

They also do an analysis which shows how it has increased over the last couple years. And you’re looking at a 20% increase in a lot of cases, really on average for the U.S., and in some states, even much higher. One thing I found interesting is I feel like a lot of times, you’ll hear there’s higher insurance premiums when we think about the coastal areas that are affected by hurricanes.

But being from the Midwest myself, I found it very interesting to see what’s going on here. You have Nebraska, Colorado, Oklahoma. So, Nebraska, Kansas, Oklahoma, and Texas, that’s your Tornado Alley. So, you’re seeing the effects with higher insurance premiums there. And then when I was reading more about Colorado, that’s starting to see the effects of wildfires.

I was a little surprised that Oregon, Washington, you’re not really seeing that wildfire effect as much relative to some other states. But when I looked at where they started, they have had increases in terms of insurance premiums, but level-wise, that were still a little bit lower. So just an added burden to think about this affordability picture.

And then, of course, economists love to make metrics for anything that when we think about affordability, OK, well, let’s have a metrics that actually shows how has affordability changed over the last few decades? This is also from National Association of Realtors. And the big picture is the higher it is, the more affordable.

But the really interesting part is that if it drops below 100, which we currently are, what that means is that a median family income cannot afford, cannot qualify for the median priced home. And so that’s interesting because when we look here, you see that’s what’s happening today. And then when we look at back to 1985, that was true then as well. So, kind of affordability is as big of a challenge as it was back then when you had interest rates in the low double digits.

Now you may be thinking, OK, well, but mortgage payments looked lower, home prices look lower, but you want to take that into account relative to the income at the time. And that’s where we get this picture. So, you may ask, OK, well, what is the qualifying income these days for that median priced home? And they also provide that data.

So here, we see, as of May of 2024, the qualifying income for a median priced home was close to $110,000. And when we look at that, what’s really striking is where it is compared to where we were on the eve of the pandemic. So that I think when we think about affordability, that is a very striking chart for me.

So those who are entering the home market at these times, what do those home buyers look like? This is from National Association of Realtors 2023 profile on home buyers and sellers. I think a lot of attention gets paid to the median age of a first time home buyer. There’s been a lot of news about that age having popped up over the last year or so. It’s currently 35 years old.

But when I look at the longer time trend, yes, it’s higher than where we were in 1985. And just as some background, one of the reasons why this analysis looks at relative to 1985 is because that’s the year the average, when we look at our different generations, the average Baby Boomer would turn 30.

And we tend to think about 30 as maybe when you would start to be looking to purchase a home. So, looking at that analysis, OK, but it’s still relatively flat. What I find so interesting, and this has been my party trick over the last week, is to walk around and ask people, what do you think the median age is for a repeat buyer? And no one has said anything with a five handle on it. It’s been maybe 44, 47, and it’s 58 right now.

So, I think that’s just when we’re thinking about folks that they have their starter home, and they’re looking to maybe move into their second home. What does that [look] like? And we’re just not seeing that activity until much later. So that to me was very interesting.

But I don’t want to discount the fact that first time home buyers are still entering the market. In fact, when we look at the historical trend, it has trended down. It was kind of already starting to do that. What we saw is that in 2021, when we had a lot of that housing activity, it was like a third of that activity was first time homebuyers. So, you saw that millennial generation starting to enter the home market. You started to see that.

Now there was a drop in that in 2022. 2022 was a rough year for housing all around. We’ll talk about some of that a little bit. But for 2023, that median share went back up to 32% And now this data is annual. They do their study on an annual basis. But in their monthly data, they also report where these metrics are, and it’s still about 30% of the most recent home sales. And these are for repeat sales, so not new builds, but existing homes, still around 30%. So that’s something I like to highlight, is yes, it’s much more difficult, and the affordability is a challenge, but we still are seeing first time homebuyers enter the market.

The other thing that I look to, and so I started my career during the financial crisis in 2008 and 2009. And I pretty much read anything I could find on what was happening. And so, one of the things I feel like when I first was watching home prices accelerate the way they were, is OK, well, what are the fundamentals underlying the home price situation?

And one of the things that brought me comfort was looking at, OK, there was a lot of activity in 2020, 2021 in terms of mortgage originations. Those were very high credit scores for the most part. So, we see that the big share of those, that’s a credit score above 760.

The second share there, we see above 720. Whereas if you look back to what was happening in the early 2000s leading up to the bursting of the housing bubble, you see that you don’t have that proportional share in those higher credit scores. So just something that was making me, OK, well, the fundamentals, that the underwriting on these mortgages is more solid.

So, then what are we actually seeing right now in sales, and then what are we seeing in construction? One of the things that I will mention is that after the housing collapse in mid-2000s and then the financial crisis, housing construction really, it was very low. It was hit very hard by that. And then it just didn’t come back at a pace to keep up with population.

And so you’ve kind of had this situation where construction, it has been low, it has been coming back. But this was a supply issue that was already kind of a big story being talked about. And then we look at what happened with the pandemic. Just kind of keep that in the back of your mind.

So here we look at total existing home sales. You see, we’ll focus in on the pandemic afterward. So that boost in housing sales post-pandemic are kind of when the pandemic recession occurred. That’s the housing boom that I keep talking about in current day. So, you see a lot of home sales, a lot of transactions. Then you have mortgage rates jump in the early 2022, and you see a very sharp decline in existing home sales during that time.

There’s been kind of ups and downs, and that a lot of that, if you look at of what mortgage rates are doing at that time, you’ll kind of see some in mortgage rates move lower. You see a little more activity in the housing market but still very, very low.

And then here on the right, I have for the Midwest. So, you can see the regional effect. And we see a similar story. Perhaps you don’t see as big of the-- we aren’t getting back to where we were during the financial crisis era. You’re getting a little bit closer when you look at the U.S. as a whole, but still seeing that same dynamic.

So, we saw the big hit to housing activity. And so, when you kind go back to your Econ 101 textbooks, and you think about, OK, well, if you raise interest rates, it’s supposed to depress housing activity because housing is very interest-sensitive. And when that happens, prices tend to go down.

But we just saw in the very first slides that prices continued to stay elevated, even after all that appreciation we had during that burst of housing activity. So, one of the things that’s at play here is just simply a lack of housing supply in the U.S. economy right now. This is existing inventory. So, these are homes that are resold. So not new construction, but we call it existing.

Here, what you see is that it was already trending down. And then it essentially hit lows post-pandemic. And then there’s been some ups and some downs. It’s kind of starting to look to trend a little bit up, but we’re still much lower than where we were.  

Now a lot of what we’re kind of seeing is that if you’re looking at all of that mortgage origination that we had in 2021 when rates were very low, those people that locked in at that low rate, when you’re now looking at, OK, maybe I’m ready to buy my second home or maybe I’m finally ready to stop renting and buy my first home, well, the people that are first time homebuyers, they don’t have a mortgage that they’re leaving to make that decision.

But when you look at the people that already own a home and have a very low interest rate, that decision becomes a lot harder. It’s a lot harder to be like, OK, well, even if I have this home and the price didn’t change, just the interest rate alone, you’re looking at a higher mortgage payment. So, they tend to call that the lock-in effect. So, when you hear about the lock-in effect, keeping that level of existing inventory so depressed at this time. That’s that piece that’s keeping upward pressure on prices.

Because it all goes back to supply and demand. If you have demand, and we still do from that millennial generation being ready to start their first homes, and people wanting to upgrade to their second home as they expand their families, that demand is still there. It’s just there’s not enough houses at the time. So, you see that upward pressure staying on prices. And that’s my view. There’s other dynamics, and perhaps you may have questions and things, but that’s kind of the thing I come back to when I think about what’s happening right now with existing inventory.

Now one of the kind of silver linings, if you will, is that what we saw first with-- here this is single family construction. So, part of that big burst in housing activity during post-pandemic, during the pandemic era, you see that construction got involved. So, you see construction saw there was a need for more houses. There was a lot of activity. Prices were rising. It was very enticing to enter the market. You saw a big surge in single family housing.

This is essentially two metrics. So, you have permits, which is what you need in order to break ground on that new construction, and then starts when it’s actually been started. A lot of times you hear people talk about housing starts. I like to look at permits. You see the trends are a little bit clearer. It’s a little less volatile. It’s not weather dependent. You know you’re going to start that project when you actually start may depend on other factors. So that’s why I show both.

But what you see then is then you had the higher interest rate environment start in early 2022. You see a drop-off in housing construction. And you see that both for the U.S. and the Midwest here on the right. What’s interesting though is that even though borrowing costs remained high in 2023 and are still high today, we actually saw construction start to come back last year.

And so, when we look at this, well, why is that? Well, house prices remained elevated, and there was a lack of existing homes for sale. And so, it created room to build these new homes and satisfy some of that pressure on the housing shortage. Now more recently, we’ve seen that turn back down. So, whether that’s kind of run its course, up here, I have temporarily boosts. At this point, it kind of seems to have run its course. Where it goes from here will probably depend on the interest rate environment and things of that nature. But it was an increase, and so you do see some increase in supply.

And what you also see is that when you look at new home sales, you see a similar dynamic. You have the housing boom and then the sharp decline. But it didn’t fall nearly as much as it did with existing homes. You don’t have a lot of newly built construction sitting on the market vacant. They are being sold.

Now they may need to be sold at a lower price than where they were in ’21. But that’s where when we looked at new home prices earlier, you saw that they had kind of peaked and were coming down a little bit. So, builders may offer incentives, things like that. But it’s held up OK. And if we look at the Midwest, in fact, total new home sales are still trending higher.

So, in terms of where does that leave us on the overall inventory in the market, well, we know for existing, it’s very low right now. But when we look at new single-family houses that are on the market for sale, and this could be that they are not built yet, but you could buy the plot of land. It could be that they’re under construction, or it could be that they’ve already been built, and then you’re buying them that way. So, all three ways are included in this.

You see that new homes available for sale continue to trend higher. I will give a caveat that this scale is much lower than my previous existing home. It’s still the case that there’s more existing homes available for sale in the market than new homes, and I’ll talk about that in a minute. But I wanted to zoom in just to show you the trend.

Now one thing I’ll note is that that growth that we see in terms of the amount of inventory on the market that are newly built construction, it’s mostly in the South and in the West. So, it’s not so much that those homes are building up here in the Midwest. They’re typically just selling. When we saw that kind of burst of construction before, they tend to sell. So that overall inventory available, that’s more of a situation in the South and the West where you may see that put a little more downward pressure on prices there.

But this chart is something I find very interesting. So, when I put that together. So OK, well, I had my data on existing homes that are available on the market for sale, and I have the data on new homes. Where do we stand overall? And if you look at the overall market right now, if you look at everything for sale, it’s something like 30% is new construction. And that is much higher than we were pre-pandemic.

Now the pre-pandemic trend, you see the reflection of the bursting of the housing bubble in the 2000, in the financial crisis, and then as new construction started to come back. But I think that just shows how out of whack the market is right now and also helps explain why you’re seeing that kind of compression between new home prices and existing home prices.

So, kind of where are we standing right now? So, one of the things when I sit and think about, OK, well, when will the market look back to normal? Some of the things I look at are how many listings are there actually out there right now, and how many days is it sitting on the market?

So, I think we all hear stories during the kind of really crazy times after the pandemic about houses basically selling instantly, sometimes before they even hit the MLS. They would are being shown and offers and things like that. Multiple offers, very hot housing market.

So, what we see here, and this data is from realtor.com, and it includes both new and existing homes. So, kind of puts that picture together for us. We see that overall active listings, they’re starting to come back. So still below where we were pre-pandemic but starting to come back. And then when we look at median days on market, and you can think about this as the longer it sits on the market, the more downward pressure you have on the price.

So, as we look at that, we see that OK, that’s also starting to trend back. Still below where we were pre-pandemic but starting to look a little bit more normal. But when we look at St. Louis, we really don’t see that yet. So, with active listings still well below where we were pre-pandemic. And when we look at median days on market, we see that those are also something more like 30 days, relative to 2019, more like 50 days.

So, my interpretation of that is that the St. Louis market remains tight. And to me, it kind of makes sense because if we saw all of that new home construction was mostly in the South and in the West, and OK, well, then maybe the Midwest didn’t benefit as much from that, then they’re still grappling with a little less supply.

So where are we on supply? You’ll notice I have a lot of statistics from National Association of Realtors. They have a plethora of data, and it’s all available on the web, so definitely recommend, check it out. And then they update it, so it’s fun to follow. But this is a measure that they created that looks at basically it’s a measure of the housing shortage in major metro areas. So, it doesn’t have every metro area, but it looks at major ones.

And what they’re looking at essentially is there’s kind of a historical trend of, I’m not going to remember the numbers exactly, but for every so many jobs that are created in that market, a certain number of housing permits need to be issued for construction to keep up with the demand in that market.

What you see here is, the more red it is, the higher, the bigger the shortage. The blue means that there’s sufficient supply. So, when we look at St. Louis, what we see is that kind of pale pink is pointing to the need for more permits. And this is for single family housing.

I’ll also just point you across the state to Kansas City. So, you see that they’re looking at a similar situation. A need for more permits. And when I think about OK, well, what else could I look at to tell me about housing shortages, I also look at vacancy rates. So those are still historically quite low. So that tells me that most homes are occupied or being rented.

This here is home owner. So, this is the occupied homeowner part of the vacancy rate. And you see that those are still low. So again, that to me that points that there’s still a need for more houses in the economy, both for the U.S. and the Midwest.

Now we’ve been talking about single family. But multifamily, which is apartments, can kind of help bridge the gap in a lot of these areas. So, what we see now is that, OK, in St. Louis, we still see that need for more permits. But in Kansas City now, when you add apartments to single family homes and look at that amount of supply, you see that they actually have sufficient supply.

And so, something to keep in mind is that it’s not just single-family homes, but apartments can be the answer for a lot of families, a lot of renters. And what we saw is that multifamily just took off after the pandemic. As part of that housing boom, multifamily construction surged, and you saw that both-- So this is, again, permits and starts. I don’t show the Midwest here because the data it’s a lot smaller of a sample, so it’s a lot more volatile. But you see the increase, and you see the slowing that we’ve had since then.

Now the thing that I’ll note with multifamily is it takes a lot longer to complete than a single-family home, which makes sense. You think about a big apartment building, of course, it’s going to take longer than a single-family home. So this construction wave that we saw, these are still coming on to the market.

And what we see is that, OK, well, as they come on to the market, it is helping the vacancy rate situation when we look at the U.S. rental market. Now focus here on the U.S. first. So, we see that there was very low vacancy rates, kind of in ’21, ’22, and then it started to improve as those multifamilies came onto the market, those apartments. Midwest, I do not have an answer for why we’ve seen that drop in the most recent number. I will note this is quarterly. And also, you just notice in general, that these are volatile data. The Midwest is volatile. So, I’ll be keeping an eye on that to see, OK, is that declining? Are we seeing vacancies still really depressed here? And that could be, again, part of that very tight market. Or is it just one month of noise, and it’ll pop back up.

The reason why vacancies are important and thinking about housing supply in terms of the multifamily market is because instead of having something to do with the price that you’re paying to own it, it’s the price you’re paying to rent it. And so rent prices have been a big story and a very important part of the overall picture in the housing market.

What we see here is this is the U.S. median apartment asking rent. This is from Redfin. I will note that there are a lot of different metrics on this. Some may show overall median apartment asking rents are higher. They have different samples that they’re looking at. Some may show they’re a little lower. But I think the overall trend is what I want you to focus on here.

Since this is for the U.S. as a whole, what we see is that you have that surge in rent prices as you had those very low vacancies and not enough multifamily at the time. And so rent prices increased during that time. Then as it kind of started, you see more apartments coming on to the market, more supply, so putting downward pressure on prices, you start to see an easing following that peak. Now in the most recent data, you start to see it kind of tick up. So that’s something to keep an eye on.

And the reason why this is so important is because well, one, we have to rent or if you have family members that are renting. So from a kind of a real life perspective, of course, we care about how much things cost. But from a policy perspective, this also matters because these feed into inflation metrics.

I’m going to focus here on the consumer price index. But a lot of the methods here, a lot of the essentially, there’s different metrics. I don’t want to get too wonky on you. But essentially, we’re going to focus on the consumer price index, but this is a story for also the Fed’s preferred measure of the PCE price index.

And the PCE price index uses a lot of the data from the CPI price index. So, they’re definitely the same story, even if the data I’m showing are different. So here we have the inflation story over the last few years. We have headline CPI inflation in the blue and then core CPI inflation in the gray. Obviously, we can do a whole talk on inflation. But for this evening, I just want you to focus on the fact that we see it moving back to more norms that would be consistent with a 2% inflation objective that the Federal Reserve has but not quite there yet. Now how do rent prices factor into this? Well, when we actually look at headline CPI inflation and break it down by component, one of the things that we notice is that, OK, while the surge in inflation during ’21 and ’22, we see a lot of that in core goods. We see the lot of it in energy and food, both at restaurants and then at home.

But what we see happening more recently is have this, when we look at shelter, which is our housing services, we see that that contribution has moved up, up, up, up, and it’s now starting to come down. And when we think about, OK, well, didn’t we just see that rent inflation is pretty much already back to-- it was even declining for a little bit. Why is this still such a large contribution to CPI inflation?

Well, that comes into basically how the data feed through. And so here I have the Redfin median monthly rent. So that’s just my same metric from my previous slide. And then I have a couple other measures. So, the new tenant rent and the all tenant rent are produced by the Federal Reserve Bank of Cleveland. So, they did research to actually look at, OK, what is the sample that the CPI is using to look at rent prices in the economy?

And one of the things you may be thinking about is, OK, well, renters, how many of us in this room are renters? You don’t have to raise your hand, but it’s probably a smaller share than how many are actually home owners. And so, when we think about, OK, well, if this is just rental prices, then that doesn’t apply to a lot of the consumers.

But it also takes into account if you are an owner, so if you have an owner-occupied home, what is the rent that you’re missing out on by owning that home instead of renting it out? And essentially, this is called owner equivalent rent. So, we won’t get into all the details here, but the idea being that this thinks about rent from an actual renter perspective but also from an owner’s perspective, and it uses real rent data to compute that.

The weight on the CPI for housing services is a very good size weight. And actually, it’s a little bit higher than what you see in the PCE price index, which is why right now, we’re seeing CPI still running above where PCE is. But the main point for this is just to see, OK, well, you see that those market rents are feeding into the new rent part of the CPI component. It’s happening faster.

What this is doing is essentially, if you think about just from a practical point of view, if you have-- rents have gone up for you’re going to look at a new apartment, you’re probably going to pay a higher rent. But what if you have been in that apartment, and you signed a three-year lease. Maybe you haven’t actually incurred that higher rent cost yet. And as, basically, they work through the sample, that’s what’s happening. There’s just lags and when these new rent prices actually feed through to the entire market. And that’s why you see when you look at all tenants, not just new tenants, you see that it’s a slower effect. And also, it’s not as large. So, you see that. And then when you look at actually that shelter component, we see that that is following that one very closely.

And you see that it’s trending down. So, this is right now where you’ll hear a lot of times, housing services, it’s still a large contributor. There’s confidence in how this works. And in the future, this should continue being less of a contributor. But we want to keep in mind that this is based on real markets and real rents. And if you start to see rents moving back up, that could kind of challenge the path going forward here. So, keep that in mind, that it all kind of comes together in that way.

So just to wrap up, and then we’ll have a panel here, and we’ll take some of your questions. But basically, hopefully these are the kind of points I address tonight. So big picture, the market is dealing with higher prices, higher mortgage rates, higher insurance premiums, and all of that come together to create still a challenging environment for potential homebuyers.

When we look at the kind of basics of supply and demand in the housing market, from my point of view, I still see that housing demand is outpacing housing supply. And this is why we’re still seeing that upward pressure on prices, even in a higher interest rate environment. That should be putting some downward pressure on housing activity.

One of the things, when we think about housing activity, we’re thinking about construction. We’ve seen a lot of ups and downs in the past year. We had very strong gains during that pandemic era housing boom. We saw a decline sharply in 2022 as borrowing rates increased. It picked back up in 2023, in my interpretation, as seeing a need for more homes on the market. And so new construction responded to that. Before tapering off again this year. So, a lot of ups and downs.

And one other thing I’ll note is that when you look at gross domestic product for the U.S., residential investment, it’s a major component there. And so, this construction activity, you see the effects on when you have construction activity really falling, that’s going to be a drag on overall growth in the US economy. When it’s coming back, when it’s increasing, that moves to a positive contributor. So, kind of bringing it to the big picture.

The other thing I’d like to talk about is just multifamily. So, we saw that boom in construction. It has since slowed. We’re seeing now construction starts for multifamily is kind of back to where they were pre-pandemic. But that wave of new construction and multifamily is still hitting the market. And so that’s helped put some downward pressure on rent prices. There’s still elevated, but they are not going up at the pace that they were during that housing surge.

And then when we think about, in general, how does this affect the inflation picture, well, essentially, that surge in rent prices that we saw, it’s still working its way through the economy. It’s still getting priced into rent agreements and leases, and that’s essentially why we see such a slow process. So, continue to keep an eye on that going forward.

So that concludes my part of the session. I think I ended just a little bit early, so we should have a little more time for our panel and Q&A.

Charles Gascon: Thank you. And I’d like to welcome Victoria Gregory up to join us for the panel. Victoria is an economist in the Research department with me. Her focus and research interests are in macroeconomics and labor economics. And she does structural modeling and uses microeconomic data to better understand her research topics. She received her Ph.D. from NYU. And thank you for joining us. I will come join you guys over here. I’m going to give Kathleen a break for a second to drink some water. And I’ll start with you, Victoria. Where are my questions for you?

So, you’ve done some really interesting work lately. And I listened to your podcast on my way home from work one day talking about how the life cycle pattern of home ownership has changed over generations. And I want to dive into this topic. But can you start by just explain to me what the life cycle pattern is for everybody in the audience as well?

Victoria Gregory: So, thanks so much for having me on the panel. Also, I’m really excited to share some points from my research. So as Chuck said, I mainly work on labor economics but recently I’ve been looking into home ownership patterns for different birth cohorts. So, things like, how do millennial home buying behaviors differ from Gen X, and boomers, and how does-- I guess, we don’t have much data on Gen Z. But how have they been evolving so far.

And so, one of the first things I was trying to think about, as Chuck mentioned, was about the life cycle profile of home ownership which just means that what’s the proportion of people who own homes as a function of age. So typically, people enter the labor market, people start going off on their own, early 20s. Mostly everybody starts out not owning a home and then as they age, they become more and more likely to at some point buy a home. So, I was trying to see-- so I was trying to look at how this pattern-- how this pattern has changed across the generations. So has the rate of home ownership steepened for different birth cohorts, when does it flatten out, et cetera.

Gascon: So, one of the areas that you were looking at across generations was difference in income and education. Can you explain a little bit about what some of the differences are that you’re seeing with respect to people of the same education in different generations and what the impact has been on home ownership?

Gregory: And I think this goes back a little bit to actually one of the first charts that Kathleen had on her slides, like typical incomes versus-- well, I was looking more at typical home ownership rates. And so, the pattern of home ownership income typically increases over the life cycle. So, I wanted to see, for example, at age 30, are millennials earning similar rates to Gen X-- similar incomes to Gen X to their boomer parents, et cetera. So, I wanted to see how this has changed. And I also broke it down in terms of college-educated versus non-college educated.

So, if you look among college-educated workers, it seemed like at every age in the life cycle, they were earning kind of similar incomes to their counterparts at the same from previous generations at the same age. This looked a lot different if you go look at non-college educated workers where you do see a slight income gap for future generations. So non-college educated millennials were earning less at age 30 compared to Gen X compared, to boomers, things like that.

Then I wanted to see, so there’s not much of a gap in terms of income for college educated. There is a slight gap for non-college educated. I wanted to see if these translate over to home ownership patterns. And so, what I found was that actually even among the college educated-- even among college educated millennials, they were still less likely to own homes compared to Gen X and boomers at the same age. There is also a larger gap for the non-college educated. But it seemed like there’s-- this, to me, pointed to the fact that there must be something more at work besides income in driving this home ownership gap across the generations.

And I think just to put some numbers on it, if you look at-- I mean, not breaking it down by education, I think by age 30, I was finding that just under 50% of boomers owned homes by age 30. And that number for millennials was around like 29-30%.

Gascon: So, one of the other things that you look at is locations, and how locations were changing among the different generations, and where they were choosing to live. Can you share a little bit about what you were finding with respect to location preferences, where people wanted to buy their houses?

Gregory: So one hypothesis I had was that maybe more and more jobs have become increasingly located in cities and maybe cities have gotten more expensive, which is why-- which is why later generations have been less likely to own homes compared to earlier generations. So, I wanted to break down people’s location patterns in terms of whether they live in cities, suburbs, more rural areas.

And so, you can look at those data in the American Community Survey as to the counties in which people live. And you can categorize them into some different categories. So, things like central parts of the city, then you’ve got the suburbs to these big cities. And then for smaller-- and then for more small, medium-sized metro areas, you can just break those down in terms of size. And so, I wanted to look at, for instance, I want to look at people in their 20s and then again in their 30s and see if their location patterns have changed.

So, what I found is that for people in their 20s, it seemed like actually earlier generations were more likely to be living in the central part of cities. It seemed like for millennials and Gen Zs, they were starting out their 20s, they were more likely to be living in these more medium and smaller metro areas their 20s.

But then as you get into their 30s and you look at them again-- so there are no Gen Zs in their 30s yet. So, I don’t really know what’s happening with them. We don’t know what’s going to happen with them yet. But it seemed like all of the generations started to converge. So, it was something like I think 40% of people in their 30s across all of the generations tended to live in central cities. Then another 20%-25% in the suburbs and the rest in medium to small metro areas. So it seemed like even though later generations were starting out living in different places in their 20s, they’ve converged to all looking the same in their 30s So I found that interesting.

Gascon: Thank you. Kathleen, hopefully, I gave you enough of a break. Now I’m going to dive into some questions. Thanks, Victoria. So we posted a question online and it was an unscientific poll. And we are the Fed, so I wasn’t surprised by the answers. But we asked people what the top concern was with respect to the housing market. And the options were mortgage rates, housing prices, inventory, and economic uncertainty. Half of respondents mentioned mortgage rates really seemed to be the top concern with the housing market.

So I wanted you to-- and I know you touched upon it a little bit, but can you dive a little bit more into detail to explain how the mortgage market operates? I know you mentioned once that it’s not tied directly to the Fed funds rate and there is a lot that’s going on in the background. So, can you just provide a little bit more context of how these mortgage markets work and what that means for the housing market?

Kathleen Navin: Sure. So, one of the things I like to point out is that it’s a real market rate. So, with the federal funds rate, that is an administered rate. So, the Federal Reserve determines, OK, that is where it’s going to be. But how that interest rate actually gets into the economy is through private borrowing rates, such as corporate bond rates, such as mortgage rates. And when you’re a mortgage banker and you’re sitting in your office looking, OK, what should we be pricing these mortgage rates, a lot of them look at the 10-year Treasury yield.

And so, in my previous life with S&P Global, in our model, essentially, we were looking at mortgage rates as a spread to the 10-year Treasury. So that’s how in my mind, I always think about it. And so, you’re looking at OK, well, what is the risk looking out at a longer horizon. And I know typically, mortgage-- so we look at the 30-year mortgage rate. It’s still the case that it tends to be very correlated with the 10-year Treasury yield.

But the reason this is important is because the 10-year Treasury yield moves every day. And any of us have been watching since last Friday, you’ve seen that the 10-year Treasury yield, it went down very quickly and then it came back up. I actually didn’t check what it did today. But that is going to then go into pricing of mortgage rates.

And so what we saw over the last week was that the 30-year mortgage rate, it already has declined. It was something-- I think it was 6.63% on average over the previous week. Now we look at where it was last October. It was getting close to 8%. And that entire time, the federal funds rate hadn’t changed. So I think that’s just what I like to point out is these things are priced in real life. And we look at averages, it’s helpful.

And typically, an average is a good sense of what it’s going to be even in your local area. Those things tend to not have too much dispersion. Maybe some. I haven’t done a lot of research there. But just to point out that pricing in real time.

So, when we think about where is the-- I’ll just pre-empt a question I think that’s going to be coming. So now that mortgage rates have come down, what’s going to happen to the housing market? And what’s going to happen to prices? And I think this is a question still to-- we’ll see what the answer is. But the way I think about it is OK, we know housing demand is still there. There’s not enough housing supply.

Well, if interest rates fall, then you may bring a little more supply onto the market, maybe it’s enough to have some of that lock-in effect alleviated. But there’s still that demand. And so, if demand is still strong, it’s still going to keep upward pressure on prices. And in fact, if you have someone sitting on the sideline right now waiting for the interest rate to fall, we could actually see more demand come in. So, I think until that supply picture works its way out, you’re still going to have that upward pressure on prices, even if it does start to get alleviated somewhat as that market of works itself out.

Gascon: Thank you very much. I will open up the question. We already got one hand popping up in the back. Go for it. Please turn on your microphone.

Audience Member 1: Yes. Well, just on a personal note, I just got my homeowner’s insurance renewal policy two days ago. It was up 36% over-- and that’s on top of a 24% increase last year. So that’s in the St. Louis area. So, I don’t know what it is in California and in Florida. But I know in Florida they’re not even insuring in a lot of cases.

But my question is you mentioned the median household income to median home sale price in 1985 and that ratio was about 3 and a 1/2, right? Is that correct? Well, I actually got the number from 1993 and it was actually 2.2. So, it actually went down in the early ’90s. But then in 2007, right before the crisis, it went up to 3.8. So, 3.8 is higher than what it had run in the previous 20 years, I guess.

But my question is now in 2022, that ratio is up to 5.8. So right before the housing bubble bust and we had the financial crisis, it was 3.8. Now it’s at 5.8. I think there’s a problem there. Is there a problem of the housing crisis like we had in 2008?

Navin: So, one of the things that I-- so this is why I wanted to put up a couple charts on vacancies and also on credit scores. So, I also became uncomfortable with the amount of price appreciation I was seeing. And so, I started to look in, OK, well, but what is driving up that price. And I keep coming back to this demand versus supply situation. That supply just needs to come back and that’s how markets work themselves out.

When I look at where the demand is coming from, it’s still higher credit scores. The incomes are having to be higher in order to qualify for those. And overall, you see low vacancy rates, which still suggests that that’s part of that price pressure. And I look back to the housing crisis that we had in the 2000s, you see high vacancy rates. You see a lot more lower credit scores in terms of those originations. And so, you see how that bubble was created.

So, I’m looking at the underwriting standards around this. One of the things there is a Senior Loan Opinion Officer Survey. And they show, basically, underwriting standards for different loan types. And on residential mortgages, it’s still the case that lending standards are tight. And so that’s something that gives me some comfort that it’s really more of a supply and demand story than fraud and what we were seeing leading up to the crisis with a lot-- there were things propping up the housing market that weren’t fundamentals, I should say it that way.

Audience Member 1: So that’s on supply and demand. But what about affordability? Because there used to be a 28% rule. I don’t know if it’s used anymore at banks where your mortgage payment couldn’t be more than 28% of your income. Is that rule ever used again? Because now, a new home buyer, it’s close to 50%

Navin: Well, and I think that is-- I need to look at this a little bit more. But when we see those qualifying incomes increasing, to me, that suggests that it is responding to the fact that you need to have a higher income to help keep that ratio reasonable. I don’t know if either of you have anything to add.

Gascon: Just to piggyback off of what Kathleen has outlined, with respect to demand, it’s important to realize that the pandemic shock had a significant impact on housing preferences and housing demand. So we know that there was a dramatic increase in the demand for housing and single-family housing. So how long that lasts for is still a question, if that’s a permanent shock or if that’s going to adjust itself.

The other point that I would note is some of the other underlying factors that we’re seeing in the charts, which is first-time home buyer ages are going up. The average age of the homeowner is going up. When we’re looking at median incomes, that’s across everybody.

And so what’s happened is as these costs have gotten higher, is it’s forcing people to wait longer in their lives before they can buy a house. And there’s more and more houses out there. I think it’s about 40% of homes are owned by people that have no mortgage debt whatsoever. So, there is a lot of wealth tied up in housing as well—

Audience Member 1: With all the baby boomers.

Gascon: Exactly. So there are structural changes that have occurred in the housing market that have pushed people later on in their lives and made it much more challenging for the median household to purchase the house, which is why you see the multifamily numbers that we’re seeing with rents, the number of units that are being built in the rental market to meet that need because of the challenges in housing affordability.

Audience Member 1: But that doesn’t—

Gascon: I want to go to some other questions, too. We can talk more if you want to add something. But I see a couple other hands popping up.

Gregory: I was just going to add something about demographic changes. So even before the pandemic, I was looking at these life cycle trends of earlier generations and even they have been buying homes later. I did notice that these earlier generations-- or later generations have tended to get married later, have kids later, they’re more likely to hold student loan debt. So, I don’t know which way the causation goes for this but these are both interesting parallel trends that may have something to do with each other.

Gascon: The back over there. Can you turn on your microphone so we can all hear? Thank you.

Audience Member 2: My question, actually I asked this online too so I’ll just skip that one if you get to it. But basically, you know how you did the comparison using college education as a variable. I was wondering if you did that for any other professional trades just because, I guess, going by firsthand experience, the friends and family, even in the millennial range, were purchasing houses in their early 20s if they went straight from high school into a trade and didn’t have the college debt piece or the time of college education working against them, pushing it to that 30 and higher? So, they were already getting maybe their second house by 30-type thing. So, I didn’t know if you did anything of that brought the age down, whether or not—

Gregory: Yeah, I haven’t broken it down into-- I’ve only did college degree versus non-college degree. But I mean, I would say that’s a little bit consistent with what I saw with the data in the sense that college-educated workers, they do have less of a gap in terms of home ownership between the generations. But it’s not entirely-- it’s not as large as the non-college educated. So, I would imagine there’s something in between going on with the trade.

Audience Member 2: Yeah. That’s what was saying. It’s more of asking the question of: they’re not college educated but they’re educated in this other way that actually is sometimes giving them a leg up in terms of the home buyer piece of it, I guess.

Gascon: So I think I’ll see if I can-- I think are you getting at-- what Victoria was finding was that the average income of those people without a college degree at age 30 today is lower, adjusted for inflation, than those of previous generations.

Audience Member 2: Yeah so that would-

Gascon: So there’s an income effect that’s going on that those people of earlier generations had a higher income. So if they were entering trades, at one point, they were accumulating income. And by that point in their life, they had a higher income, adjusted for inflation, than those people at the same age today without a college degree. So the occupational component, in my mind, would be captured by the income numbers.

Audience Member 2: Gotcha. And that’s all I was asking was similar to her using that as a variable, whether you’re saying, hey, this group of 30-year-olds went into a professional trade, this one didn’t. So, it’s a different whole study. It has nothing to do with college education.

Gascon: OK. So I see where you’re going with that.

Audience Member 2: Yeah. Because I’m saying in that case, you may see--

Gascon: We have a third group of people based on what occupations they went into, non-college degree, skilled trade.

Audience Member 2: --did they go into a professional trade or not.

Gascon: All the way in the back.

Audience Member 3: Hi. I mean, I wanted to piggyback off of the first question in pointing out that it seems like housing prices relative to income have obviously increased quite a bit in the last 10-15 years. And it seems like it would suggest to me, I guess, that supply really hasn’t kept up with demand even in that time period. So is it really-- at this point, this seems to be a bit of a longer-term trend.

I don’t know what the causes of this are on the supply side as to why it’s not keeping up. But is that something we should be worried about in terms of sustainability of the housing structure in America going forward? And what evidence or reason should we have to believe that that’s just going to self-correct at some point in the future?

Gascon: So, the financial crisis in 2008 and 2010 had a large scarring effect on the housing market and the construction market. So, you see this major drop in the number of new homes that are being constructed. And it has never recovered to the rates that it used to be at. And it has never kept-- and it hasn’t been able to keep up with household formation.

One of the reasons for that is you had a lot of people that were working in these skilled trades that left the labor market and they never came back into it. So, what we hear from a lot of businesses across our district and across the nation is there are labor shortages in the space that continue to keep a cap on how many homes we can actually build in the country.

The other challenge that we have in building new homes is the geographical mismatch of where do people want to live, where can we feasibly build homes, and where are new homes being allowed to be built. And those two factors combined have created a bunch of different tensions in the housing market that are still working their way out. The outlook, I think, in many ways is uncertain.

You have to see things like automation, new technologies in the way that we can build homes so that we can build homes with less labor. Those things are going forward. It predominantly starts in commercial construction and then eventually works its way into single-family housing.

There also the-- immigration topic always comes up when you talk about construction. And that’s an area where you start to see some workforce come back in and alleviate some of those pressures. But there are a lot of challenges in trying to get that back up to where it was. And I’d say a lot of the challenges we see today are still lingering effects from the 2008 and 2010 downturn.

Audience Member 3: I had just one more follow-up. Do you think that-- and this is a question of mine. Do you think that the lack of union density and the recession of labor unions in America has caused people to leave some of these professions? Does that have any impact at all in terms of why there may be a shortage for those types of workers?

Gascon: I would say that income stability and employment stability is a key driver of some of these days in occupation. Construction has always been a stable occupation. Again, the housing crisis dramatically changed the perception of how stable jobs were in the construction space. And that alone made those changes.

As you think about the role of unions, I’m not going to dive into the details of that. I would just note, I think where you look at where a lot of the housing construction is going on in the country and you look at union maps, I think a researcher would have a hard time parsing these two things together.

Gregory: I think the decline in unions started even earlier than this, like late ’80s, early ’90s. So I don’t know if it exactly coincides with a lot of these changes in the housing—

Gascon: And the construction work, I think another thing I would note-- and I had a conversation with our Urban League of Louisville about five years ago and they were trying to get more people into the construction space. Because there’s a shortage, people travel long distances and they may live in a different city for a period of time while they’re building on a project.

So that, again, limits the people who want to work in this space. It’s not like you can go home every night and then go to the next town over and continue to work. So people are spending months away from their houses or their families to do the work. So it’s just a completely different job in a lot of ways than what we would think about from a typical construction job even just 10 or 15 years ago. You got a question online?

Bre Best: Yes, we have a question online. The question is, what influence do you see in the data from corporate investors, short-term rentals, and private equity groups on the housing supply or the home or rental pricing?

Navin: I can answer this. So, this is a question I get all the time. So essentially went back to the office, started looking into this. And when you think about institutional investors, well, one of the things is that’s different than when we think about, OK, if you are an investor but you’re just a mom-and-pop shop. So, when you see, OK, well, this was a house that is purchased for rentals, that majority is still the mom-and-pop shops over the U.S. as a whole.

So, I think the statistic is really something like, only 3% of that market is institutional investors for the U.S. but it’s very different city by city. So, Atlanta has a very large share of institutional investors. Here in the 8th District, a study I saw put for Memphis something more like 11% of that market was institutional investors. And so, in that sense, just more competition for those homes will put upward pressure on prices.

But when I looked at it as the U.S. as a whole, I was surprised the number was more single digit instead of this very big effect. But it’s very much a market-by-market story. On that same study that I was looking at that showed 11% for Memphis was 4% for St. Louis. But really, you see it in Atlanta, you see it in the sunbelt, and you see it in California. That’s where this is more of a situation, less here locally.

Gascon: Go for it.

Audience Member 4: So, one of the things I’m curious to hear your guys’ thoughts on with the charts on home price appreciation is the lessons for quantitative easing. And in the last cycle, you had mortgage-backed securities being bought up at a pace that I don’t think had been done before as this tool to deploy massive amounts of capital into the economy.

And if you had just had the moves made by Congress and other quantitative easing moves but took out the factor of all of these sort of artificially cheap acquisitions of MBS that were driving down mortgage rates, how do you think those metrics would look different today if you had taken out that component of quantitative easing during the COVID cycle?

Gascon: Take a stab at that one? OK. So, first of all, the purpose of quantitative easing was to push down interest rates at the long end of the yield curve. The research that I’ve seen, and don’t quote me on these numbers, I’m happy to follow-up with you and share the reports, it’s about 50 basis points was the effect-- and I don’t know the number of my head if that’s per trillion dollars of asset purchases. But the numbers are relatively small. I think we’re not talking about a difference between 3% interest rates and 7% interest rates or anything of that matter. We’re looking more in basis point in terms.

But there is a body of research. There has been research by some of our colleagues here at the Fed that can definitely point you to pin down those numbers of what the impacts of the quantitative easing were on estimates on interest rates. Now with respect to mortgage rates, again, those have risk to them. So, we also have to think about the risk profile of mortgages versus-- I think most of those studies are looking more at Treasury rates.

Audience Member 4: So I guess just to follow-up on that, that research on impact of asset purchase and quantitative easing on interest rates, that’s not specifically at the asset purchases of mortgage-backed securities—

Gascon: Well, agency mortgage-backed securities were backed by the federal government, so they were essentially risk free. But when you get to now a homeowner going out and getting their own mortgage, there’s a risk associated with that that the lender is always going to take into consideration.

Audience Member 4: Yeah. And I guess I’m talking about the period where the Fed was the biggest buyer of MBS. So the market wasn’t pricing for a period of time the risk.

Gascon: You’re talking about after the housing crisis?

Audience Member 4: No, I’m talking about during COVID when one of the levers that was being used to drive money into the economy was—

Gascon: I think we’re going to lose most of the audience. I’m happy to follow-up with you on the topic. But I think we’re going to lose most of the audience on that.

Audience Member 4: It’s a deal.

Gascon: OK. Bre, go for it.

Best: We have another question online. Have you looked at the cost of construction compared to the relative cost of home pricing?

Navin: Yes. So that’s a very important point that I had a slide on and then I took it out, but I should have kept it in. So essentially, when you look at the increase in new home prices that you saw during the pandemic boom for housing, a lot of that was higher construction costs.

So, we had a surge in construction costs that got reflected in new home prices. You hear the stories about lumber, things like that. Even though situations with lumber and that have been alleviated, the cost of construction is still elevated. And so that does play a big role into the price of new homes.

I will note that when it comes down, you see less pressure on the new home price. So those are very related. And Census Bureau, I think it’s Census Bureau, but they put out monthly figures on cost of construction. So, you can track that along with new home prices. And yeah, it’s definitely a part of the story.

[INAUDIBLE]

Audience Member 5: Thank you. [CHUCKLES] I just wanted to ask, moving into the fall, like September, October, and into the winter, do you see the federal rate dropping some to help stimulate the housing market? And if yes, why? And if no, why?

Gascon: So, the Fed’s dual mandate has to do with price stability and maximum employment, not necessarily focused on the housing market. So, I think it’s important to note that monetary policy is-- while the housing market is affected by changes in interest rates, that’s not the objective of making changes to the Fed funds rate. It has to do with maintaining stable prices and maximum employment.

The most recent projections that came out in June from the FOMC put, I think, was it 50 basis point, 75 basis point interest rates lower at the Fed funds rate by the end of this year. So those were the latest projections that the policymakers released in June. They’ll update those projections in October as to what the path is.

And then I would point you to what the Fed Chair has spoken recently about the path for interest rates. A lot of it has to do with, again, the dual mandate, understanding what the path towards price stability is if we’re getting close to getting back to that 2% target and if policymakers feel like they’re confident in that, and again, what’s happening in the labor market with respect to if the labor market remains healthy or if there are signs of further easing in the labor market. So those are the places that the policymakers are going to be looking at, not necessarily the housing market.

Now, that being said, again, the first place that we typically see changes going on in the economy with interest rate movements, as we’ve seen with mortgage rates in the last couple of weeks, even though that’s market determined, you do see that affect, the housing market and construction, as one of the most interest rate-sensitive sectors of the economy.

Navin: And one of the other things I note on that is with the dual mandate-- so I focused on the inflationary piece here. But because they think the housing services is-- or when you talk to a lot of economists, that channel between rent inflation and housing services inflation, it seems to be understood that it would keep trending down.

Now, you can’t take it for granted. You’ve got to keep an eye on it. But it’s really that other part which I didn’t focus on for today, the core services excluding housing. So those are things that want to keep seeing price declines there, or inflation declines, I should say. But it’s not just inflation these days. It’s the labor market, as Chuck said.

And that’s something that it was very hard for me not to extend this talk to the labor market because when we think about fundamentals for housing, a lot of that also goes back to do people have jobs, and are those incomes increasing, and things like that. But at the end of the day, it’s the thinking about the dual mandate in terms of inflation and the labor market is what’s going to affect the interest rate. And then that will go into the mortgage rate and things like that. But when we mentioned labor markets, I just want to add it a little thing about what happens in the labor market is very important for housing in itself.

Gascon: So, it’s 6:55. I’ll come to you if nobody has any other questions. But we have time for one more question if anybody has it. Let me just get the-- oh, you have another one online? Go.

Best: Yeah, this is a fun one. Are there any new trends that you’re seeing either anecdotally or in the data in the local housing markets?

Gascon: Yeah. Sure, I can touch upon that briefly. So, with respect to multifamily, which I think has a lot of dynamics that are still at play, I think with respect to the impacts of interest rates on the single-family market, as Kathleen outlined, they’ve already worked their course. Because it takes longer to build multifamily properties, some of those dynamics are still at play. So, we’re seeing a lot of new units coming online, particularly in the central business district and inner ring suburbs. And that’s putting a lot of downward pressure on new rents in the region. And we’re seeing that in the data.

When you go out into some of the more outlying suburbs, where there’s still a really strong demand for housing, there’s not as many multifamily units coming online. So rent growth in some of the outlying areas of the St. Louis Metropolitan area still remain really strong.

And I think that’s broadly true around the country, which is Kathleen’s pictures with showing the press rent growth. A lot of that’s coming from a lot of supply coming online in central business districts and inner ring suburbs. But rent growth and house price growth in some of those outlying suburban areas still remains very robust as the amount of inventory coming online has not kept pace with the demand in those areas.

So that’s something that we’ll definitely have to keep an eye out. And then because the permits numbers have come down in both single family and multifamily as we move into 2025, some of those shortages that have persisted in the single-family space can start to work their way over into the multifamily space too, because there won’t be as many deliveries of apartment units as we move into 2025 and into the latter half of the year.

With that, we’re at 6:57. So I would just like to thank all of you for joining us today. And hold on. I’ve got to find my remarks. There we go. I’ve got to thank Kathleen for a great presentation and Victoria for joining us up here for this discussion.

For all of you in the audience, thank you very much for joining us. It’s great that you can come down here and have a chance to come into the Fed Bank. I know it’s not an easy building to get into and it takes a little bit of effort. So, we really do appreciate you all coming in here. And for those that were able to join us online, thank you very much. A recording will be made available. So, if you want to go back and look at any of the slides or the presentation, that’ll be available on our website.

If you’re interested in learning more about the housing market, the Federal Reserve Bank of St. Louis and the Federal Reserve Bank of Chicago are doing a three-part webinar series that will examine critical components of policy, and partnerships, and preservation necessary to increase housing supply in our communities.

This three-part series is called Unlocking Housing Opportunities for America’s Workforce. And it starts next week on August 15. More details for that are available on our website and hopefully on the screen behind me now. And we’ll include that information in the email for you as well. So, if you’d like to check that out, it’ll be available for you. So, thank you very much. And be on the lookout for the email with the survey and these materials. So, thank you very much.