More homes are being purchased not as primary dwellings, but as vacation homes or pure investments, in which case anticipated price appreciation may be a large factor influencing purchase decisions.

During previous downturns in the credit cycle, banks with high commercial real estate concentrations suffered significant losses.

Federal Reserve staff is currently considering supervisory guidance on sound risk-management practices for commercial real estate exposures, with the goal of issuing the guidance on an interagency basis.

Overall, the credit quality is good. But we are beginning to see in some markets, with some customers and banks, where people are buying property now in anticipation of rising values...When you start to push to buying homes in anticipation of rising property values, safety and sound lending says you should look at the ability to service the loan first and we want to keep to that sound practice.

Unlike the behavior of commodity prices, which varies little from place to place, the behavior of home prices varies widely across the nation.  Speculation in homes is largely local, especially for owner-occupied residences.

I don't raise that issue [in the housing market] as something we have a tool to deal directly with...Our free market economy has a tough-love kind of way of dealing with excesses.

In several markets across the country, housing prices in the past year have appreciated more than 30 percent, a rate that in my view is unsustainable. There are submarkets...where you hear about speculators buying housing units—sometimes multiple units—just to flip them for a quick profit. And it seems like every week brings new stories about aggressive financing arrangements that encourage and enable such real estate transactions. I have to tell you that some of these stories we’re hearing about residential speculation make me uncomfortable.

Rising real estate prices have created conditions in which building costs are significantly less than going market values. That means it now makes good economic sense to develop, redevelop, and revitalize many neighborhoods that had fallen into decay and disrepair. The key is to leverage this opportunity for the benefit of all – both those attracted to these neighborhoods by new opportunities and those who lived there through tougher times.

Financial instability coupled with the higher interest rates it creates is the most formidable barrier to the growth, if not the level, of homeownership. Huge, highly leveraged GSEs [government-sponsored enterprise] subject to significant interest rate risk are not conducive to the long-term financial stability that a nation of homeowners requires.

Low interest rates have, in turn, been a major force driving the phenomenal run-up in residential real estate prices over the past few years, and the resultant boost to net worth must be one of the reasons households have felt comfortable directing so little of their current income to saving.

One reason that consumers are saving so little out of disposable income is that their wealth has been on the rise...recently, the main impetus has been house price appreciation. With interest rates rising now and housing prices unlikely to continuing [sic] advancing at their recent robust pace, consumers will need to curtail their spending to keep wealth growing in line with income. In other words, the saving rate might rise to more normal levels. If this happens, the falloff in spending growth by consumers could have a significant effect on overall economic activity.

Household income has grown nicely while unemployment has remained low, and, together with low mortgage interest rates, these factors have contributed to appreciation in home values.