Summers Says House Prices Are ‘Scary,’ Questions Fed MBS Buying

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Former Treasury Secretary Lawrence Summers said the surge in U.S. house prices is “scary” and questioned the wisdom of the Federal Reserve continuing to purchase mortgage-backed securities as part of its stimulus campaign.

Three days after data showed home prices jumped the most in 30 years in April, Summers told Bloomberg Television's “Wall Street Week” with David Westin that such gains are inflationary and would likely drive other prices higher.

“This is scary,” said Summers, a paid contributor to Bloomberg. “Rising house prices in most people's common sense of the world represents inflation.”

He predicted property prices would continue to climb given a shortage of supply, but said the inflation risk “needs to be taken very, very seriously.”

The Fed buys $40 billion of MBS each month as part of an asset-purchase program designed to help the economy heal from Covid-19 by keeping borrowing costs super-low. Some officials at the central bank have begun suggesting slowing such buying first when they begin to scale back their overall quantitative easing program.

“I cannot understand why the Federal Reserve, in the face of this, continues to be every month a major buyer of mortgage backed securities,” said Summers “That is the ultimate in pro-cyclical behavior.”

Nationally, the S&P CoreLogic Case-Shiller index of property values climbed 14.9% from a year earlier, according to a statement Tuesday, the biggest gain in data going back to 1988. That came after a revised 13.4% increase in March.

‘Most Vulnerable'

Summers said he was also concerned about valuations in equity markets and that they may reflect those investors with pessimistic outlooks being wrong-footed by past gains and so reluctant to keep betting against the bulls.

“It's precisely when all the pessimism has been beaten out of the system that markets are most vulnerable,” he said. “I see that as a concern right now with our markets.”

Many who have seen stocks soar since the financial crisis of 2008 have “learned the lesson that trees grow to the sky, and I think I've learned the lesson that trees are too tall to be stable,” he said. “That makes me nervous.”