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Federal Reserve Chairman Jerome Powell unveiled a new framework of thinking for the central bank that will tolerate inflation “moderately” above its 2% target. The Fed also committed to reviewing this policy every five years.

In a speech on Thursday morning, Powell acknowledged the painful lessons of runaway inflation in the 1970’s, but warned that the persistence of low inflation over the last eight years risks new economic difficulties.

“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said. But the Fed chief warned that low inflation leads to declining inflation expectations, which has the effect of “diminishing our capacity to stabilize the economy through cutting interest rates.”

The Fed’s target for inflation is 2%, measured as core personal consumption expenditures (which excludes volatile components like energy and food prices). But since establishing that goal in its 2012 Statement on Longer-Run Goals and Monetary Policy Strategy, the Fed has averaged inflation of only about 1.6%, touching 2% only briefly in 2018.

 

Federal Reserve Board Chairman Jerome Powell, reflected in the sneeze guard set up between himself and members of the House Committee on Financial Services, speaks during a hearing on oversight of the Treasury Department and Federal Reserve pandemic response, Tuesday, June 30, 2020 on Capitol Hill in Washington. (Bill O'Leary/The Washington Post via AP, Pool)

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

In its “Beige Book” report, the Fed says the overall economy in New England is “expanding at a modest pace,” with the housing market following the same general trend:

Year-over-year sales growth continued in August in both single-family home and condominium markets throughout the First District. According to contacts, low interest rates and affordable prices contributed to improving sales figures, along with increases in residential rents. Several contacts report improving conditions for borrowers, but many contacts say that qualifying for a mortgage remains difficult.

As for prices, contacts in the region report mixed movements in median sale prices, with some areas experiencing modest price appreciation and others moderate depreciation. In the Greater Boston area, contacts say a slight decline in the median sale price was unexpected in light of significant demand and dwindling inventory levels; they attribute the decline to significant increases in the sales of low to mid-tier properties. Throughout the region, inventory continues to decline. Contacts say they fear declining inventory will discourage buyers searching for homes as well as potential sellers who may not be able to find another well-kept property. Increasingly, properties in “move-in condition” receive multiple bids, sometimes above original asking prices.

Contacts expect sales to continue to grow on a year-over-year basis in the next several months. Nonetheless, many note that the recovery remains fragile and could be derailed by deterioration in economic conditions. Declining inventory levels also remains a concern, but several contacts expect an influx of sellers in the spring market. Median sale prices are expected to remain flat or improve modestly in the coming months.

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Updated:  Boston real estate 2020

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