Based on the information in hand, it seems reasonable to expect that economic growth will moderate toward a more sustainable pace as the year progresses. In particular, one sector that is showing signs of softening is the residential housing market.

At this point, the available data on the housing market, together with ongoing support for housing demand from factors such as strong job creation and still-low mortgage rates, suggest that this sector will most likely experience a gradual cooling rather than a sharp slowdown. However, significant uncertainty attends the outlook for housing, and the risk exists that a slowdown more pronounced than we currently expect could prove a drag on growth this year and next.

So far, the early signs of cooling in U.S. housing markets are broadly consistent with the degree of moderation I've envisioned. Home sales, especially new home sales, are off their peaks, and mortgage refinancing is way down. Moreover, the available evidence suggests that the rate of increase of selling prices for new homes has slowed over the last several months. Looking ahead, the ratio of new houses for sale to those sold—a kind of inventory-to-sales ratio for homes—has risen rather sharply since the summer, suggesting that other signs of cooling in the housing market may become more evident.

I am increasingly concerned about the well-known long and variable lags in monetary policy—specifically, that the delayed effects of our past policy actions might impact spending with greater force than expected. This could show up especially in the housing market and via housing prices and balance sheet effects on consumer spending. While I expect the housing sector to slow somewhat, I will be highly alert to the possibility of the policy tightening going too far.

There has been a good deal of discussion about froth in housing prices, and most forecasts of GDP that you see factor in some moderation in home price appreciation and residential investment. Indeed, the slowdown in housing should be an important factor in bringing growth back to potential. So far, housing has been moderating in a way that is broadly consistent with these forecasts. But if housing markets soften more appreciably, we could see a more significant negative effect on overall spending.

There is also the possibility, however, that housing markets will remain solid—for example, because of support from the continued low level of long-term interest rates. This would then heighten the risk of above-trend GDP growth and the further development of pressures on resources.

The housing market has had an amazing run in recent years...You won’t hear me use the B-word to describe this remarkable activity. Instead, I believe fundamental factors can fully explain the expansion we’ve seen in the demand for housing, particularly rising incomes, rising population, favorable tax treatment, and very low interest rates. At the present time, mortgage interest rates are not as favorable as they were a few years ago, and so it is not surprising that we are seeing some signs of a tapering off of residential activity in many markets. For example, there were 1.28 million new single-family home sales last year, but so far this year the sales rate has averaged 1.14 million. I see this not as a precipitous decline, but rather as a return to more normal conditions in many markets...Looking ahead, it seems reasonable to expect the housing market to remain strong, even as some further tapering off in sales and production takes place.  The key point I would like to emphasize is that the housing phenomenon was not a mysterious, independent boost to the economy, driven by some sort of animal spirits, but instead was a rational response by households to the economic fundamentals, especially very low real interest rates. 

My sense is that Massachusetts and New England will experience some sustained cooling in real estate markets, and some flattening of prices, but this trend is not likely to affect the region overly negatively, and likely not more than the nation as a whole.

A risk to the U.S. forecast would come from a significant reversal of the boom in house prices, which could have a very restrictive impact, especially through negative wealth effects. However, so far, I’d say that we’ve only seen early signs of a cooling off in U.S. housing markets.

The much-anticipated slowdown in housing activity appears to be playing out in an orderly way.

My hunch, though, is that housing activity will stabilize and remain at a high level this year. I base this forecast on the belief that the FOMC 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. That said, some slowing in the growth of average home prices nationally seems a reasonable expectation at this juncture

By my reading, the incoming data suggest that the housing market has begun to cool somewhat, but they do not point to a sharper falloff. Sales of both new and existing homes have declined in recent months, although they remain at a high level; and after cutting though volatility likely related to swings in weather, housing starts appear to have softened recently. Moreover, other indicators of activity, along with anecdotal reports, also seem consistent with an easing, but not with a sharp downward correction.

A decline in consumer confidence is another channel through which a correction in house prices could affect the economy. In the current situation, a sizable deceleration in house prices could have an outsized effect on consumer confidence and thereby reduce household spending by more than is implied by conventional estimates of the wealth effect.

Our expectation is that if and when the housing market slows, that savings rates will tend to rise. So we have built into the forecast, so to speak, some increase in personal saving.  As home values grow more slowly, then consumers can rely less on the increase in equity as a source of wealth-building and therefore must save more out of their current income. And, again, that's to be expected.  As I've indicated, our current expectation is that process will be gradual and is consistent with continued strong growth in the economy.  However, as I also indicated, the housing market and the consumer response to any changes in the housing market is one of the risks to the forecast and one that we'll be monitoring closely as we try to assess the state of the economy in the coming year.

It is not unreasonable to think the [housing] situation is manageable, albeit worth watching closely.