Fed needs to strike housing balancing act
Among the brightest bits of news linked to the COVID-19 epidemic was the report last week that home sales are booming in the United States. The pace of home purchases jumped by a record-high 24.7% last month, according to the National Association of Realtors.
Analysts credited low mortgage interest rates and a limited supply of houses for the boom.
Think back a few years to the so-called Great Recession. You may recall it was sparked by a crash involving sub-prime mortgages, or home-buying loans granted to people who could not make the monthly payments. When that house of cards tumbled, it dragged the economy in general down. Specifically, it was very bad for the home construction industry because of the large number of repossessed homes that flooded the marketplace.
Now, with an apparent shortage of homes available for purchase, housing construction should make a comeback from the slowdown linked to the COVID-19 epidemic.
Federal Reserve policy makers may well be smiling at the news. Clearly, their strategy of holding interest rates down to bare-bones levels has been effective in restoring the economy to normalcy.
At the same time, the Fed needs to engage in an exceedingly delicate balancing act. Interest rates need to be held down enough to keep the housing market booming. But a watchful eye needs to be kept on the quality of mortgages involved in the process.
Another round of mortgages granted to people whose incomes are not adequate to make monthly payments on houses would do the economy no good.