Economy Watch: Boston Fed Head Worried About CRE Bubble

The Boston Fed's president noted that high real estate prices and the growth in mortgage debt on multifamily properties are of particular concern.
Real GDP Growth, Source: BEA, Haver Analytics, Credit: Federal Reserve Bank of Boston, Exploring the Economy’s Progress and Outlook

Real GDP Growth, Source: BEA, Haver Analytics, Credit: Federal Reserve Bank of Boston, Exploring the Economy’s
Progress and Outlook

Speaking before the Greater Concord Chamber of Commerce in New Hampshire last last week, Federal Reserve Bank of Boston President Eric Rosengren noted a number of things of interest to commercial real estate, including vague statements (but no more than that) about the timing of an interest rate increase. Gradual normalization of interest rates is warranted, if incoming economic data justifies it.

He further made the point that the market remains too pessimistic about the fundamental strength of the U.S. economy. That means the likelihood of removing monetary accommodation (raising rates) is higher than is currently priced into financial markets, he posited.

More to the point about commercial real estate, the central banker emphasized that it’s a market of particular concern, noting that prices now exceed the peaks reached prior to the financial crisis, and growth in mortgage debt on multifamily properties is up sharply from lows reached in 2010. Naturally he didn’t use the term bubble, but it was there between the lines.

“History shows that most periods of serious financial instability involve a scenario in which debt is high relative to a volatile underlying asset, and the value of the asset subsequently declines,” Rosengren said. (The bubble pops, in other words.) He cited the scenario that played out in New England in the late 1980s and early 1990s, and said “it is important that we take actions early enough to avoid a repetition of that experience.”