Financial stresses in the U.S. real estate markets could become more prominent if government support fades ahead of a sustained recovery, a senior U.S. Federal Reserve official warned on Tuesday.
“The effect of the pandemic on real estate has been uneven as the boom in single-family residential housing has been accompanied by higher vacancy rates in most segments of commercial real estate,” Kansas City Federal Reserve Bank President Esther George said in remarks to the University of Missouri-Kansas City Real Estate Symposium.
“While the strains on real estate finance currently appear contained, this relative health has been importantly supported by the extraordinary policy response to the pandemic,” George said.
“If support fades ahead of a sustained recovery, stresses could become more prominent, especially against a backdrop of disruptive structural change,” the Fed official noted, adding “a worrying scenario” is that the economic impact of the pandemic outlasts the policy support programs currently in place.
“Should that occur, many renters and businesses could find themselves unable to meet their obligations, forcing banks to realize losses on existing loans and weighing on credit growth and broader economic activity,” she said.
George also warned that the financial stability implications of real estate can “hardly be understated” as the pandemic will cause some significant structural changes in property markets.
“Most recently, many accounts trace the roots of the 2008 financial crisis to excesses in residential real estate financing. In addition, the lessons from disruptions to commercial real estate financing in the aftermath of the financial crisis are equally important today,” she said.