St. Louis Fed President Pool: Housing to Level Off
St. Louis, MO, March 8, 2006--The housing sector may already be cooling, but it should level off at high levels and not undermine the country's economic expansion, St. Louis Federal Reserve President William Poole said on Wednesday.
"My hunch ... is that housing activity will stabilize and remain at a high level this year," Poole told the Regional Chamber and Growth Association at a breakfast meeting. A copy of his speech was made available prior to delivery.
"I base this forecast on the belief that the FOMC (policy-setting Federal Open Market Committee) will keep underlying inflation low and stable, and that the growth of real household income will recover nicely due to the waning influence of last year's spike in energy prices.
"Continued healthy job growth will also help keep housing conditions at a high level," he said.
Poole, who is not a voting member of the FOMC this year, said rising inventories of unsold U.S. houses signaled a slowdown may be underway.
Some economists forecast a downturn in the housing sector after rampant price rises sap consumer spending, which has been driving U.S. growth since a shallow recession in 2001.
They argue that homeowners have extracted equity from now more valuable homes to support spending despite weak income growth in recent years, but Poole dismissed this concern.
"The marginal contribution to the pace of consumer spending stemming from the wealth effect--that is, from households extracting a portion of their home equity to spend on goods and services--is not likely to be a significant concern."
"The reason is that other economy-wide developments, especially income and employment growth, typically exert a much greater influence on the consumer's pocketbook and spending habits than does the state of the housing industry,' he said.
On the other hand, there was some evidence that the housing market might be experiencing some sort of slowdown after its strong gains in recent years, and Poole said that this was already factored into the U.S. central bank's thinking.
"As noted in the minutes of the FOMC meeting held on January 31, 2006, policymakers are expecting some weakening in housing construction," Poole said.
He played down worries of wider disruption from the bursting of a housing bubble, which he did not believe existed at a national level, though some markets may have overheated:
"The conventional view, which I subscribe to, is that a housing price bubble does not exist on a national average basis, but there may be pockets ... where prices have risen beyond levels that can be justified by economic fundamentals."
Poole repeated the Fed's long-standing mantra that it was not possible for policymakers to identify bubbles in advance, an argument they use to justify not intervening to curb price rises in any asset market.
"Given that bubbles always burst--if there is no burst, then there was no bubble--clear advance evidence of a bubble can never exist.
"If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place," he said.
