discounted value of the future benefits of home - ownership, which, in theory, should be the potential market value of the rent from the house. and, just as the rate of return on equity should fall along with interest rates, so should the rental rate of return on houses. with rents changing very slowly over time, we ought to expect that, other things being equal, lower interest rates would raise house prices. in addition, households may be weighing houses against alternative investments other than bonds. in that regard, the collapse of expectations for gains from holding equity have undoubtedly made real estate relatively more attractive, contributing to price increases and higher activity. on the supply side of the market, the scarcity of desirable land relative to population growth naturally puts upward pressures on prices. in addition, productivity in construction has lagged gains in the this conclusion proved relative robust to alternative models using varying definitions of permanent income and wealth. in all models, the elasticity of the demand for housing relative to user cost was 0. 5 and that of consumer durables was 0. 9. overall productivity of nonfarm businesses. consequently, it should not be surprising to see the price of housing rise relative to the prices of other goods and services. the combination of demand and supply factors has caused house price gains to outstrip per capita income gains in recent years. the top of chart 5 shows that the ratio of house prices to per capita disposable income has increased substantially since 1998. but owing to the decline in mortgage rates, this has not made housing less affordable. the bottom of chart 5 shows an index of housing “ affordability, ” which compares the mortgage payment on a typical home to median household income ; high levels of the index mean greater affordability. although house prices outpaced income through much of the late 1990s, housing remained quite affordable by historical standards. it does not appear that the rise in prices has meant that the market is being supported on an increasingly narrow base, given increases in incomes and declines in interest rates. if interest rates were to rise so that real mortgage rates were equal to their long - term average, the affordability index would drop back, but only to a level that would still leave houses more affordable than they were in the second half of the 1980s. conclusion : implications and policy choices in sum, the rise in housing prices and the increase in household investment in houses and consumer durables do not appear out of line with what might be expected in the current environment of low

to require a period of below - trend growth and some softening of labor market conditions. restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. before concluding, let me briefly address the condition of the banking sector. the u. s. banking system is sound and resilient. as detailed in the box on financial stability in the june monetary policy report, the federal reserve, together with the treasury department and the federal deposit insurance corporation, took decisive action in march to protect the u. s. economy and to strengthen public confidence in our banking system. the recent bank failures, including the failure of silicon valley bank, and the resulting banking stress have highlighted the importance of ensuring we have the 2 / 3 bis - central bankers'speeches appropriate rules and supervisory practices for banks of this size. we are committed to addressing these vulnerabilities to make for a stronger and more resilient banking system. we understand that our actions affect communities, families, and businesses across the country. everything we do is in service to our public mission. we at the fed will do everything we can to achieve our maximum - employment and price - stability goals. thank you. i am happy to take your questions. 1 a box in our latest monetary policy report, " developments in employment and earnings across demographic groups, " discusses differences in labor market outcomes among segments of the population. 2 a box in our latest monetary policy report, " developments in the federal reserve's balance sheet and money markets, " discusses changes in the size of the federal reserve's balance sheet. 3 for a discussion of bank credit availability, see the box " recent developments in bank lending conditions " in the latest monetary policy report. 3 / 3 bis - central bankers'speeches