For a December 2017 meeting of the Federal Reserve Bank of Kansas City’s Community Development Advisory Council (CDAC), members traveled to Omaha, Nebraska, to get an up-close, ground-level look at the region’s economy.
Members of the council - community development professionals from across the region - toured Seventy Five North, a model of purpose-built housing that blends aﬀordable dwellings, child care, an elementary school and social services into a single community setting.
Along for the tour was council member Cris White, executive director and chief executive oﬃcer of the Colorado Housing and Finance Authority (CHFA). White’s organization has completed projects similar to Seventy Five North, and for him the Omaha tour provided an opportunity to learn about other successful housing developments in the Kansas City Fed’s seven-state footprint.
“It’s amazing to see these things go up,” White said. “An apartment building gives people, individuals or a family a safe environment and a way to be housed economically so they aren’t rent-burdened. What that gives to the community is stable tenants who are buying groceries, going out to eat and who are involved in their community.”
Research by the Kansas City Fed shows that stable, aﬀordable housing beneﬁts the broader economy. As a key part of its work, the Bank studies and analyzes housing on a daily basis to support overall ﬁnancial stability. Through its community development programs and its advisory councils, including the CDAC, the Bank also conducts outreach and builds partnerships related to improving housing overall.
“Affordable housing is economic development,” White said. “When housing is created, construction and other jobs are created. People who are housed aﬀordably have more money to spend on other essentials, food and health care.”
How and why the KC Fed studies housing
Issues tied to housing weave throughout the work of the Bank in its mission to conduct monetary policy, supervise and examine banks, and provide ﬁnancial services. Economic data are regularly provided to Bank President Esther George, a member of the Federal Reserve System’s Federal Open Market Committee (FOMC), which meets roughly every six weeks to set monetary policy and determine interest rates for the nation.
“Growth of real gross domestic product (GDP) is an important measure of a nation’s economic health, and the housing sector is typically one of GDP’s largest components,” said Jordan Rappaport, a Kansas City Fed senior economist who specializes in studying the housing market. “For the United States, it accounted for one-sixth of GDP in 2017. Three quarters of the U.S. housing sector in 2017 took the form of consumption: the aggregate rent from tenant-occupied housing and the estimated aggregate rental value of owner-occupied housing. The remaining quarter of the U.S. housing sector in 2017 took the form of investment: spending on the construction of new houses and apartments, spending on renovating existing houses and apartments, and brokers’ commissions on home sales. Gauging the health of the U.S. economy thus depends in part on understanding what is driving housing consumption and investment.”
Rappaport’s most recent research in The Macro Bulletin, “Pent-Up Demand and Continuing Price Increases: The Outlook or Housing in 2018,” indicates a comparatively slow growth of housing consumption relative to previous years, despite briskly growing consumption of other goods and services other than housing. These factors indicate that pent-up demand for housing may be increasing, both among existing households wishing to move into larger apartments or houses and among individuals who are ready to form new households.
Rappaport notes that construction is not keeping pace with demand, which could have to do with a low supply of construction workers in this time of relatively low unemployment.
“The Federal Reserve’s mandate is price stability and maximum employment,” Rappaport said. “The ability of the economy to adapt to changes in technology right now depends on the ability of people to move, and that depends on housing. We have a big problem with (available housing) right now.”
Rappaport pointed to Denver as an example of a city in the Tenth District—the seven-state region served by the Kansas City Fed—that has a housing shortage causing prices to rise. At the Kansas City Fed’s Denver Branch, associate economist Sam Chapman looks closely at issues aﬀecting the economy in the region comprising Colorado, New Mexico and Wyoming. Housing is one of the top three issues he monitors regularly. He compiles “databooks” of regional economic indicators, including housing market information, to provide to Bank policymakers and the public on a regular basis.
When rumblings of housing aﬀordability issues in Denver reached Chapman several years ago, he delved into data related to the issue to develop an index that would measure averages of aﬀordability. Employers in the Denver area were concerned about their own employees being able to ﬁnd homes.
"This was especially true in the mountain regions in Colorado,” Chapman said. “We were deﬁnitely hearing that aﬀordability was a big issue.”
Chapman’s research ultimately determined that it was less aﬀordable to live in the region than in the United States as a whole.
“Our role is to shed some light on aﬀordability, how it can be measured and the proper way to think about it,” he said. “We are looking at the overall health of the economy and housing aﬀordability is an important factor.”
Another Kansas City Fed senior economist, Kelly Edmiston, looks at housing issues largely as they aﬀect low- to moderate-income (LMI) communities.
“When I think of the most important issues facing the LMI communities, housing is critical,” said Edmiston, who specializes in community development research. “One of the most basic needs someone would have is housing.”
Edmiston’s research weighs a variety of factors and assesses the impact those factors have on neighborhood stability.
“Normally people think of the Federal Reserve as macroeconomists, but we do have economists interested in other areas, such as regional economics and community development,” Edmiston said. “We want community development organizations and the general public and policymakers to be well-informed about issues aﬀecting the LMI community—and adequate and aﬀordable housing is a huge part of that.”
The Kansas City Fed’s Supervision and Risk Management Division oversees and examines Tenth District commercial banks. Within this division, surveillance and risk analysis staﬀ monitors data to look for trends that may impact the health of banks and, by extension, their communities. Chuck Morris and Jim Wilkinson lead this function at the Kansas City Fed. The surveillance department serves two critical purposes: to help bank examiners better understand banking conditions in the Tenth District and the nation, and to update senior management, including the Bank’s president, on banking conditions that could aﬀect the economy.
“For example, we track bank holdings of mortgages and mortgage-related securities, their values, and whether they are for new home purchases or to reﬁnance a home,” said Wilkinson, an assistant vice president and economist. “The health of housing markets has a direct eﬀect on banks through the eﬀect on the quality of mortgage-related assets. The housing market also is an indicator of current and future local business conditions, which is likely to aﬀect bank performance.”
Using several databases, analysts and risk specialists have access to information about local market conditions and data for about 60 percent of all mortgages across the country.
“This is an enormous data set that comes in monthly by the terabyte,” Wilkinson said. “It includes hundreds of millions of data records that can help tell a story about what is happening in the local economy.”
Morris, a vice president and economist, agreed.
“In general, if banks make more or larger mortgages, it can be an indication that the local market is doing well,” Morris said. “If home or mortgage values are going down, it could be an indicator of a decline in the local economy and that could, in turn, potentially lead to a decrease in the credit quality of business loans and commercial real estate loans.”
In addition to analyzing millions of data points, the Kansas City Fed builds partnerships through community development and collects anecdotal data from those closely involved in housing issues. Gigi Wolf, who coordinates economic education and outreach at the Bank, and Jeremy Hegle, an adviser in the Bank’s community development function, work in tandem to support outreach related to housing. They build partnerships to support the Bank’s understanding of obstacles that can impact the ﬁnancial stability of communities within the Tenth District.
A recent conference organized by the Kansas City Fed, the Federal Deposit Insurance Corp. and the Alliance for Economic Inclusion is an example of how the Bank fosters outreach and conversation related to ﬁnancial stability with a special focus on housing. The conference, “Fighting Homelessness in the Kansas City Metro with Safe and Aﬀordable Housing Options,” covered a variety of topics related to housing, including youth homelessness, housing and economic mobility, aﬀordable rental housing and safe and aﬀordable homeownership options for moderate-income households.
Facilitating conversations related to topics that impact ﬁnancial security, such as insecure housing, is part of being a good community partner, Wolf said.
“We can produce, develop and host trainings all day long, but if we are not connected to our community partners, we’re not as eﬀective,” she said. “Part of being a good community partner is recognizing that we are all in this together. We share similar goals of creating ﬁnancial empowerment.”
For Hegle, one of ﬁve Fed community development advisers across Kansas City, Denver, Oklahoma City and Omaha, understanding housing is fundamental.
“Housing is a key component of the work we do,” Hegle said. “Without aﬀordable housing, jobs and transportation won’t get someone very far. Housing is a core component of wealth building.”
For owners and renters, housing is often the most expensive part of a household budget. Areas that lack aﬀordable housing also have trouble attracting a workforce.
“It’s a challenge from the community development perspective, especially in rural communities,” Hegle said. “If you don’t have the housing, you can’t attract the workforce. Without the workforce, you can’t get the housing. It’s a chicken-or-the-egg situation.”
The Kansas City Fed’s advisory councils, including the CDAC, provide a valuable real-world perspective on economic challenges across the region. Council meetings are convened at regular intervals and members share observations from their specialty areas with the Bank and have the chance to hear from others on the council.
As a member of the CDAC, White enjoys sharing best practices with other members. His organization, CHFA, funds family housing, transitional housing, supportive housing for homeless who require support services and home ownership ﬁnancing for primarily ﬁrst-time home buyers. White shares his expertise with Bank representatives who can use his feedback to better understand what is going on in White’s ﬁeld—and his community.
“We’ve learned that a stable place for people to call home is the ﬁrst step in helping them overcome challenges they are experiencing,” White said. “If you can live aﬀordably, you have a better chance of aﬀording transportation and nutrition.”
The Kansas City Fed’s Regional Databooks and senior economist Jordan Rappaport’s January 2018 Macro Bulletin on housing are available External Linkhere.