Asset Price Inflation
Recently, the Federal Reserve released its May 2021 Financial Stability Report, with a particular emphasis on asset valuations. Valuations are raised as a concern as “Prices of risky assets have generally increased since November with improving fundamentals, and, in some markets, prices are high compared with expected cash flows”. While not cited as a matter of high alarm the report commented that “House price growth continued to increase, and valuations appear high relative to history.”
On May 25, FHFA released the purchase-only house price index for March, showing a record-high growth rate of 13.9%, far above the bubble-era peak of 10.7% attained in 2005. Housing fundamentals are of course supportive with mortgage rates below 3% and economic activity rebounding as vaccine optimism spreads. The unique factor now in housing is the impact of the pandemic on preferences for housing away from density and towards suburban and smaller-urban centers. This new fundamental can easily be seen via booming housing demand during the pandemic as measured here by purchase mortgage deliveries to Freddie Mac.
In a recent post we noted that occupancy type can play a role in overall market activity. It’s interesting to note that the period of time from 2017-2019 when house prices rose at a pace faster than overall demand was during a period of softening of investor activity in the market:
The “smart money” it seems, was put off by high valuations during that period, but ultimately returned with the onset of the pandemic and associated new positive fundamental. Another example underscoring the importance of big data tools in the assessment of macro trends.
 We use Freddie Mac instead to total GSE deliveries because Freddie loan-level disclosures go back to 2007 while similar Fannie Mae data commence in 2013.