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On Day 2 of Fed Chair Jerome Powell’s Congressional testimony, he responded to questions and statements from members of the House Financial Services Committee. 

And once again, pretty much as expected, the cost of housing was a popular topic for discussion. Ranking member Maxine Waters stressed its importance in her opening remarks. And four other Committee members asked Powell pointed questions. 

Be sure to tune in to today’s Hot Sheet, where Byron Lazine broke down all of Powell’s remarks on housing.

Housing as a Core Inflation Driver

During her opening statements, Ranking Member Maxine Waters emphasized the impact of housing costs on core inflation and outlined the Democratic Party’s legislative efforts to address the housing crisis. Her first mention of housing came at 12:28:

Waters: Now, while I’m pleased to see that inflation is declining, the latest data makes clear that housing remains the number one driver of core inflation. Since 2020, house prices have increased by nearly 50% with Americans now spending on average over 30% of their income on housing. This is a top priority for Democrats but remains an afterthought for Republicans. Earlier this Congress, I reintroduced my comprehensive legislation housing package including the Housing Crisis Response Act. This bill provides more than $150 billion in fair and affordable housing investments representing the single largest investment in affordable housing in our nation’s history. These funds would create nearly 1.4 million affordable and accessible homes, bring down housing costs for all and revive the American Dream of Home Ownership Committee. Democrats are committed to getting this bill across the finish line and continue to hold out hope that our Republican colleagues will finally join us in this effort.” 

Powell Emphasizes Fed’s Commitment to Price Stability

Fed Chair Jerome Powell responded to Waters and other opening speakers by emphasizing the Federal Reserve’s mandate to maintain price stability and maximum employment, stressing the importance of their independent role.

Powell (23:01): “…Congress has entrusted the Fed with the operational independence that is needed to take a longer-term perspective in the pursuit of our dual mandate of maximum employment and price stability. We remain committed to bringing inflation back down to our 2% goal and to keeping longer-term inflation expectations well anchored. Restoring price stability is essential to achieving maximum employment and stable prices over the long run. Our success in delivering on those goals matters to all Americans. I’ll conclude by emphasizing that we understand that our actions affect communities, families and businesses across the country. Everything we do is in service to our public mission. Thank you. I look forward to your questions.”

Impact of Housing Costs on Consumer Sentiment

Congressman Mike Flood (Nebraska) expressed concerns about the persistently high housing costs and their effect on consumer sentiment, asking Powell for his insights (starts at 01:20:37).

Flood: “I’d like to raise concerns with housing costs. While shelter is one component of the broader PCE calculation, housing often makes up one of the largest, if not the largest expense for many consumers. Inflation for housing remains persistently high. One of the characteristics of this economy is that consumer sentiment is remarkably low. Do you think high housing costs could be contributing to the persistently low consumer sentiment?”

Powell: “I think high prices generally, I think nobody really can be super highly confident of their answer on this, but I do think it’s the fact that while inflation has come down, prices are high, if you know what I mean. And people are paying more for things, more for housing, more for the essentials of life, food, energy, and that to me is how I would explain surveys. We say that the economy’s growing, inflation’s come down, unemployment’s low and all that’s true, but prices are high.”

Housing Affordability Challenges

At 01:34:05, Congressman Wiley Nickel (North Carolina) highlighted the severe impact of rising housing costs on his constituents in North Carolina and questioned Powell on the implications of high interest rates.

Nickel: “The rising cost of housing hits my constituents especially hard in North Carolina. Our ranking member Maxine Waters has made this a big priority for the work that we do in the committee in North Carolina. We’ve got 343,000 households that spend over half of their monthly income on rent, leaving little money for other expenses like healthcare, transportation, and food. Access to safe and affordable housing is essential to the well-being of working families and individuals in North Carolina and around the country. Chair Powell, despite the strong economic trends you mentioned in your testimony, housing prices and median rents have increased by nearly 50% and 41% respectively since May of 2020, and they continue to rise. In fact, housing costs continue to outpace modest wage gains, high interest rates continue to add to those costs. For example, high interest rates make it more expensive for home builders to finance new housing. High interest rates also cause landlords to charge higher rents and lead to higher mortgage costs for would-be home buyers? I know that you and your colleagues at the Fed are correctly focused on bringing down inflation—important goal—but have you considered that at this point with housing cost increases being the primary driver of inflation, keeping interest rates high only towards that stated goal?”

Powell:“So a couple of things are happening with housing. Before the pandemic, there was a pretty serious housing shortage and we can’t do anything about that. Then the pandemic comes along, and we really think the best thing, the most important thing we can do for the housing market in the medium and longer term is to get inflation under control so that interest rates can come down, so that we can get back to a more normal interest rate. No one knows exactly where interest rates will go, but they’ll be lower than they are now, and the housing market supply and demand will work their way out, and you’ll have supply of housing. There’s still going to be a housing shortage at the end of that, though. And it’s true that our policies work through interest-sensitive spending. Housing is maybe the most interest-sensitive form of spending—buying houses with a mortgage. And we know that we have really significant effects in that market and it is tough on people. But this is the path to getting inflation down, which will bear fruit for many, many years.”

Housing Supply Issues

Representative Brittany Pettersen (Colorado) discussed the significant home price increases and lack of supply starting at 01:43:39, asking Powell about the broader impacts and potential solutions.

Pettersen: “I really appreciate the discussion around housing in an earlier question because this is the greatest inflationary costs, especially in Colorado where we have seen significant home price increases, a lack of supply, people are unable to move because they would go to a much higher interest rate and then people are unable to buy because they can’t afford those mortgage payments. And so while you’ve talked about recognizing that lowering the interest rates will actually help with addressing the housing crisis, we still have a lack of housing supply. So can you talk a little bit more about what’s happening and that the lower interest rates are only a piece of this?”

Powell:“It’s a longer term thing, and a lot of it is it’s harder to get lots and zoning and materials and workers. And in many, many metropolitan areas, the near-in areas are all built up. If you look around Washington, I grew up near Washington DC and it was countryside just a couple of miles outside the beltway. There was no beltway when I was born. But ultimately it’s just we have not enough housing, and that was true before the pandemic. And certainly, the pandemic did slow down housing construction. I think we’ll get back to a more normal economy with lower interest rates, those sorts of things, but we’re still going to have a housing shortage.”

Pettersen further explored the impact of the pandemic on commercial real estate and regional bank stability, seeking Powell’s perspective on long-term risks.

Pettersen:When I think about the other pieces of the fallout from the global pandemic and the changes that we saw in our economy was in commercial real estate, and I’ve continued to read about regional bank failures and the risks that the commercial real estate poses in the long term for those assets being on the books for banks, what is your insight on the risk that it poses for our financial stability and what we should be thinking about here in Congress?”

Powell:“So the commercial real estate situation, which is it’s significantly downtown office and related retail and things like that. This is something the banks have been working their way through for the last couple of years. I think it’ll take more time, more years to work all the way through it. We know from the stress tests and from our own work that the large banks, they’re going to be okay here. Some of the regional banks and smaller banks have what you would expect, which is high concentrations in their local community in real estate. We are aware of those. The banks are aware of it. I think the supervisors have been around those banks making sure they have capital, they have liquidity, they have a reasonably not too optimistic assessment of how much capital they’ll need, how big the losses will be. So I think we’ll be working through this and it doesn’t seem to be a systemic problem or one that threatens a broader financial stability. It does threaten bank profitability and those sorts of things, and it’ll be with us a while. We’ll just keep working our way through it.”

Impact on Mortgage Market

Congressman Scott Fitzgerald (Wisconsin) raised concerns about the impact of increased regulation on banks’ involvement in the mortgage market, questioning the stability of housing finance at 01:50:08.

Fitzgerald: “There’s been a clear trend of banks stepping away from the mortgage market kind of in the face of the increased regulation. That’s my interpretation, at least. Non-bank lenders have stepped in to kind of fill that void today. Banks support the non-bank lenders and the broader housing finance system through the so-called warehouse lending for home mortgages. But I’m deeply concerned that some of the, as was mentioned by my colleagues earlier, that some of the basal rules could harm both bank and non-bank lenders alike, kind of undermining the liquidity and kind of the raising costs of home buyers. So let me just ask in regards to Basal III, the end game proposal, could it make housing finance less stable, I guess is the question?”

Powell:“That’s certainly not the intention and we’re again well aware of the concerns that have been raised and certainly paying careful attention to those.”

The discussions during Fed Chair Jerome Powell’s testimony to the House Financial Services Committee underscored the critical role of housing costs in the broader economic landscape. The questions and testimonies highlighted the persistent issue of rising housing costs and their impact on inflation, consumer sentiment, and overall economic stability. 

Powell reiterated the Federal Reserve’s commitment to its dual mandate (given by Congress) of achieving maximum employment and maintaining price stability, emphasizing the importance of addressing inflation for long-term economic health. 

For a deeper dive into Jerome Powell‘s remarks on housing, tune in to today’s Hot Sheet with Byron Lazine.