With signs of softening housing demand, Dallas Fed economist Enrique Martínez-García is sounding the alarm that policymakers must be careful with the housing bubble. As home sales contract in response to the Federal Reserve's inflation fight, Martínez-García warns of the housing market's delicate nature.
Heading forward, Martínez-García believes it's possible the Fed might be able to deflate the housing bubble without bursting it.
"A severe housing bust from the frothy pandemic run-up isn’t inevitable. Although the situation is challenging, there remains a window of opportunity to deflate the housing bubble while achieving the Fed’s preferred outcome of a soft landing. This is more likely to happen if the worst-case scenario of a price-correction-induced economic downturn can be avoided," writes Martínez-García.
How can a "gradual unwinding" be achieved? The Dallas Fed article argues that policymakers would need to "quell inflation without putting buyers under too much stress." Simply put: If inflation begins to ease, the Fed could pull back before spiked mortgage rates see the U.S. housing market deteriorate too far.
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