MNI INTERVIEW: US Home Prices Will Drop Double Digits-Calabria

U.S. home prices are on track for a double digit fall as the drop-off in construction and sales will likely help push the economy into recession, former head of the Federal Housing Finance Agency Mark Calabria told MNI.

“Things can get pretty bad. I think we’re going to see pretty significant price declines, certainly in real terms in the double digits,” he said in an interview. “It’s kind of unprecedented to go through a big contraction in the housing market and to go through a fairly tough interest rate environment and not see a pullback.”

Calabria, also former chief economist for the U.S. Vice President, said how bad things get for housing also depends on the resilience of a job market that has held up but could fray under restrictive monetary policy. “It’s hard to see jobs numbers continuing the way they have,” he said.

“We are probably in the second, third inning of a housing correction. We’ve seen volumes in sales and construction fall off a cliff but prices really truly haven’t adjusted yet,” said Calabria, now at the CATO Institute. “The wild card will be the labor market, if we start to see construction job losses in a big way.”

Housing prices have fallen for seven straight months but remain up 2.5% from a year ago, according to the S&P CoreLogic Case-Shiller Home Price index.

BANK TROUBLES TO LINGER

Financial turmoil triggered by the collapse of regional lenders like Silicon Valley Bank and Signature Bank is likely not over, Calabria said, although risks of a systemwide breakdown remain modest.

“Given that community banks really are the biggest exposure to commercial real estate and multifamily, I have to believe you could have a significant number of community banks fail. That said, it’s not inherently systemic,” said Calabria. As FHFA chief he laid groundwork for a removal of Fannie Mae and Freddie Mac from government conservatorship.

Even the biggest banks aren't immune from potential risks, he said, evidenced by the recent downfall of Credit Suisse.

“The banks are still pretty highly leveraged. Risk-based capital numbers are higher but capital looks higher mostly because banks have shifted into low-risk weight assets, not because they have a lot more capital,” Calabria said.

“I don’t want to say this means we're going to have some systemic failure, but I think there are more vulnerabilities in the banking system than we recognize.”

NO FED PIVOT

Fed Chair Jerome Powell seems intent on raising interest rates a bit further to attack high inflation, Calabria said. Financial turbulence will discourage how much further policymakers go rather than forcing a shift to rate cuts, he said.

After a year that saw the fed funds rate jump from effectively zero to 4.75-5%, Calabria thinks the Fed will hold rates at the peak for much longer than markets are pricing in. Fed funds futures are now pointing to as many as four rate cuts starting in June.

“In any other environment with the kind of problems you had in Silicon Valley and otherwise, in a normal environment the Fed would be cutting rates already,” he said.

“The fact that they’re not doing that now and are not giving indication that they’re doing it – and even the more dovish members seem to be on board with kind of staying the course for now. I don’t see a lot of evidence that Powell is going to change direction any time soon.”

Powell is very much focused on a legacy that he knows is tied with the inflation rate at the end of his term, Calabria said.

“We’re not at a point yet in my mind where problems in the banking system or the financial system are sufficient to make the Fed change direction. It may make them slow but I don’t see how it makes them change direction yet,” he said.