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Fed sees risk of major drop in US home prices remaining high


(Bloomberg) – The Federal Reserve on Friday suggested that high home prices could be vulnerable to a sharp decline following major price increases in recent years due to extremely low interest rates.

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“With valuations at a premium, home prices can be particularly sensitive to shocks,” the Fed said in its Semi-Annual Financial Stability Report released Friday.

Although housing price growth has slowed recently due to the Fed’s rate hikes, valuations are still stretched when compared to metrics like rents, the central bank said. It also cited “tense” liquidity conditions in Treasuries and several other key financial markets; high leverage in hedge funds; and high commercial property prices when compared to market fundamentals.

Fed Chairman Jerome Powell has warned that the United States is on the verge of another crippling housing bubble burst like the one it suffered 15 years ago, arguing that the parties Lenders have been much more careful in extending mortgages this time around.

That’s a point also made in the report, which said household debt remained moderate.

But in addition to indicating that house prices are still rising, the report said an economic downturn or adjusted property prices will put pressure on households’ balance sheets.

The Fed is in the midst of its most aggressive credit-tightening campaign since the 1970s as it struggles to bring inflation near a four-decade high. The S&P 500 is up 1.4% on Friday and down 21% so far this year.

The rate hike comes after years of extremely easy credit conditions that encouraged borrowers to use additional leverage and prompted investors to adopt riskier positions to boost returns.

“Today’s environment of rapidly synchronized monetary policy tightening globally, rising inflation, and high uncertainty associated with pandemics and wars increase the risk that a shock could lead to amplifying vulnerabilities, such as due to strained liquidity in core financial markets or underlying leverage,” Fed Vice President Lael Brainard said in a statement accompanying the report.

The Fed also highlighted potential risks to the US financial system from developments abroad, including ongoing tensions over China’s property market and Russia’s invasion of Ukraine. These could affect the United States in a variety of ways, including causing a general setback in risk-taking in world financial markets.

The report includes a lengthy discussion of liquidity in financial markets. While saying that the Treasury market continues to function smoothly, the Fed said liquidity is less resilient than usual. It blamed that mainly on increased interest rate volatility stemming from an uncertain economic outlook.

Trading conditions in the nearly $24 trillion Treasury market have sometimes struggled after a year of heavy losses for bonds, fueled by rising inflation, higher Fed interest rates and the U.S. balance sheet. central banks decrease.

Some market participants have warned that the loss of liquidity risks a repeat of the money market turmoil seen in September 2019, when the Fed was forced to provide adequate cash to the banking system. goods to prevent damage from spreading.

(Updated with details starting in fourth paragraph.)

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