Thursday, June 08, 2006

Housing in the Fed Crosshairs?

Is the Fed actively targeting housing? Not likely.
Are they concerned about housing? Absolutely.
Will that stop them from tightening? No.

Unfortunately, I see only two scenarios in the near future, inflation or a housing bubble burst. In reality, it is the housing bubble that is the lesser of those two evils. Why? It is going to be much easier to mop up after a bubble-induced recession than it would be to control runaway inflation.


From BusinessWeek:
Will Bernanke Tank Housing?
By Peter Coy

Ouch. It's getting harder and harder for real estate agents to put a happy face on the market. Sales are slowing, prices are falling, and the backlog of unsold homes is rising fast. And now it's suddenly looking like the Federal Reserve will raise interest rates again.
...
Bernanke's gladiator-like aggressiveness on inflation is producing scowls at the National Association of Realtors, which worries that higher mortgage rates will make the housing market even softer. The group put out a public statement on the issue this week, in which David Lereah, the Realtors' chief economist, said: "This is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable."
...
until his June 5 speech, Bernanke gave the impression that he was being careful not to tank the housing market, vowing in congressional testimony on Apr. 27 to "monitor housing markets closely." Since then, though, the housing market has done nothing but weaken, points out David Rosenberg, Merrill Lynch's chief North American economist. Housing starts are down over the past three months at a 56% annual rate. "So Mr. Bernanke is 'monitoring,' all right," Rosenberg wrote in a report on June 7. "He's monitoring the collapse of the housing market, and by the sounds of it he wants to reinforce the bear market already under way."
...
Mortgage bankers also see the market slowing, but they aren't echoing Realtors in asking for a pause in rates. That could be because they, like the Fed, hate inflation -- it erodes the value of the fixed-rate loans they make. "We've never publicly given the Fed instruction on how to conduct monetary policy," Douglas Duncan, chief economist of the Mortgage Bankers Assn., said June 7.
...
To put it differently, some economists say: What goes up must come down. One housing bear, Ian Shepherdson, chief U.S. economist for High-Frequency Economics in Valhalla, N.Y., wrote June 6: "Ultimately, we expect the level of home sales to head down to, or even below, the long-term trend. When bubbles burst, they usually burst properly. Gentle deflations are rare."

Caveat Emptor!
Grim

28 Comments:

Blogger minutesfromNYC said...

I guess the next questions Realtors will have to ask is paper or plastic...

6/08/2006 07:07:00 AM  
Anonymous Anonymous said...

Keep up the good work Bernanke. the Last FED stooge Greenspam stuck you with a mess to clean up.

BABABABABABA

Bob

6/08/2006 07:07:00 AM  
Blogger grim said...

From Bloomberg:

ECB Raises Benchmark Interest Rate to Quell Inflation

European Central Bank increased its benchmark interest rate for the third time in six months to restrain inflation as economic growth accelerates.

The 18 policy makers meeting in Madrid today raised the refinancing rate by a quarter point to 2.75 percent, in line with the prediction of all but one of the 47 economists surveyed by Bloomberg News. The median of 23 forecasts shows economists expect rates to increase once a quarter, to 3.25 percent by December.
...
JPMorgan Chase & Co. forecasts its global interest-rate indicator, based on 28 different rates, will reach its highest since 2001 by December. Turkey's central bank yesterday raised its key rate by 1.75 percentage points, more than double analyst forecasts. The Bank of Japan may lift its rate from near zero as early as next month, a survey of economists showed.

6/08/2006 07:34:00 AM  
Blogger grim said...

Also on the economic front, Jobless Claims this came in significantly under estimates..

Jobless claims fall by most in 8 mos.

The number of laid off workers filing claims for unemployment plunged last week by the largest amount in eight months, but it might have been a statistical fluke.

The Labor Department reported Thursday that 302,000 Americans filed for benefits last week, down by 35,000 from the previous week. Analysts had been expecting a much smaller decline of around 6,000.

It was the biggest one-week improvement since jobless claims fell by 65,000 during the week ending Sept. 24, a period when the claims figures were being buffeted by massive layoffs from the Gulf Coast hurricanes.

6/08/2006 08:12:00 AM  
Blogger Shailesh Gala said...

This is interesting article from Indian Economic times news paper.

Build skyscrapers, invite ruins

The earliest record of a skyscraper was the mythical `Tower of Babel’. What happened thereafter is well documented. Humanity’s future experiences with tall structures haven’t been particularly pleasant.

A strange connection, first spotted by a researcher with Deutsche Bank, was the correlation in construction of skyscrapers and economic downturns. The construction of world’s tallest buildings — the Empire State Building, the World Trade Centre and the Petronas Towers — coincided with the Great Depression, the 1970s stagflation and the East Asian meltdown, respectively.

Amid a realty bubble in Mumbai and a tricky stock market, it’s tempting to revisit the “skyscraper index”, which captures the link between the two markets. Even at the risk of being somewhat sweeping, market corrections seen in the past few weeks could well have some links to the local property market.

The current property boom is expected to increase the number of high-rises significantly. Earlier, these were restricted to southern parts of Mumbai. In the past few years, it has mushroomed in the suburbs of Powai, Mulund and Thane. The best-known landmarks at Nariman Point — Air India Building, Express Towers and Hilton Towers — were completed around 1972-74 when the world economy slowed down.

The strange linkage of a rising skyline and a falling market could be because a booming economy leads to easy credit leading to large capital investments. Loans from banks and easy money from the capital market often help real estate firms to alter the city’s skyline. Often by the time these structures are built, the cycle has turned.

The money made from stocks have also gone into property purchases, inflating prices to levels that are unheard of. Besides commercial properties, many have bought second homes.

Even globally, the taste for skyscrapers is back. The world’s tallest building currently is Taipei 101 — the name gives the location and the number of floors in the 509mt structure. Two more buildings under construction, in Dubai and Shanghai, are now in the race to emerge as the world’s tallest manmade structure.

Coupled with factors like low liquidity, slippery Asian markets and a tough stance taken by Fed — the world’s most influential monetary authority — a hot property market at home and abroad is a rather gloomy prognosis for economic recovery.


http://economictimes.indiatimes.com/articleshow/1629280.cms

6/08/2006 08:15:00 AM  
Anonymous Anonymous said...

Here's the thing,

everyone talks about how bad inflation is, but rarely does anyone speak up on its behalf. Since inflation is a horrible destroyer of monetarily stored value that makes sense... for people who have loaned other people money.

For debtors (like say, the US govt. and most Americans) there is an upside to inflation (when it comes to fixed-rate debt)and it is quite simply that they get to repay loans in a currency worth far less then that in which they borrowed. If you owe enough money, you can look at inflation as something less then a horror that is going to destroy you.

At the end of the day the massive liquidity creation by the Fed over the last 5 years (more like 10, actually) does have a positive consequence for the govt. and it is beyond unlikely that Greenspan/Bernanke et.al don't know and think about this, though lord knows they never, ever, ever will say it.

They also know and are more than happy to talk about how dangerous inflation is, but we've all played with fire when we thought for sure we wouldn't get burned, because, you know, we know how to control it.

Lindsey

6/08/2006 08:17:00 AM  
Blogger grim said...

Lindsey,

Unfortunately, that scenario works only in the short-term.

Why?

Every loan involves both a lender and a borrower. That dollar lent is a dollar invested.

As inflation increases, so does the rate payed by the borrower. After all, the lender needs to be compensated for inflation. If I'm not compensated for inflation, I'll seek another investment that will compensate me.

What happens when rates being to tick upwards, faster and faster, especially with regards to the housing market? The buyer pool begins to thin dramatically, simply due to affordability.

Can you imagine what would happen to the U.S. housing market if 30Y fixed rates went to 8 or 9 percent?

Because they just might.

grim

6/08/2006 08:27:00 AM  
Blogger delford said...

There was a time when 8% mtg money was cheap, and it was not that long ago.

6/08/2006 08:31:00 AM  
Blogger RentinginNJ said...

“everyone talks about how bad inflation is, but rarely does anyone speak up on its behalf.”

Inflation is one of the tools available in a central banker’s bag of tricks. And, there is a time and a place for inflation. In fact, inflation helped bring us out of the Great Depression. It devalued the holding of the wealthy and it reduced the debts of the poor; it acted as an equalizer. In fact, private ownership of gold was outlawed to ensure that it affected you if you had money. It also encourage that wealthy to spend money. After all, why hold onto something that’s losing value.

Bernanke knows this and it’s why he made his infamous “drop money from helicopters” to bring us out of a recession comment.

The thing with inflation is that it only works when the economy is dead and speculative excess has been wrung out. If you let inflation run away now, it will only serve to further inflate the economic imbalances in our economy. And as Grim said, the bond market would push interest rates up on its own if Bernanke doesn’t.

I also think this tool is overused. While appropriate to bring us out of the great depression, its overuse creates bubbles. After the tech bubble burst, you had a sluggish economy with too much cash sloshing around looking for a home. This will invariable create bubbles.

6/08/2006 09:46:00 AM  
Blogger RentinginNJ said...

There was a time when 8% mtg money was cheap, and it was not that long ago.

I remember reading an article from the mid/late 80’s on the housing boom at the time talking about how incredibly low 8%-9% mortgages were and how that was helping to feed the housing boom. This came after years of double digit mortgage rates.

6/08/2006 09:48:00 AM  
Blogger Shailesh Gala said...

Keeping monthly mortage same, lets say $1000.

At 6.5% rate, you can take loan of $160K.

At 7.5% rate, you can take loan of only $145K.

Reduction in Loan amount about 10% for each 1% increase in rate. This is simple math, but sellers don't look at it that way. They will still ask the prices that were paid last summer. The downward path will be gradual as there is psycological factors involved. The sellers will reduce prices only if they have difficult situation for e.g. Job Loss or Relocation etc...

6/08/2006 09:54:00 AM  
Blogger chicagofinance said...

Lindsey
9:17 AM

Interesting comments:

To your point. It is why Bernanke has an "inflation targeting" approach. Remember all discussion of strategy has to be relative to current conditions.

Also, to comment on the use of fixed interest borrowing by the U.S. Government and individuals. I agree, however, to quote one of my favorite poets Martin L. Gore,"...the key is a question of control..."

chicago

6/08/2006 10:03:00 AM  
Blogger delford said...

In addition to job loss etc, there are also the ARM resets, many will have no choice but to sell, and many may choose to walk away.


If you put no money down and many of these borrower types were sub-prime to begin with, you will have no vested interest in holding on.


You will also have some that are savvy enough to realize that if they get less for their house the move up house will be less too.

You will also have people sellling who if they have bought before 2002 or so,and have not blown their equity but tneed to move, they too can be very flexible with price.


You also have seniors who can be extremely flexible, in addition throw in your divorces, job transfers, and the people who inherit homes.

All it takes is one sugnificant price reduction, and there is you new comp.

6/08/2006 10:31:00 AM  
Anonymous Anonymous said...

well after this latest market
dump, and the statements are
beginning to arrive in the mail, to the gasps,,

you may see more inventory hit
the market as the wealth effect
seems to have left the building.

6/08/2006 11:42:00 AM  
Blogger Richard said...

talked to my friend who lives in Madison and his wife is friends with a few RE agents. basically he said the market is dead as buyers and sellers are in a standoff due to high prices/stubborn sellers wanting peak returns. there is little doubt buyers will eventually be in the position of strength and will win in the end with lower prices. sellers right now are indirectly colluding with each other due to greed. when the fire (inventory) gets hot enough watch the shuffling.

6/08/2006 01:12:00 PM  
Anonymous Anonymous said...

Grim,

I think I need to be more clear. I'm not contending that inflation works, I am entirely in the "inflation is horrible" camp. I'm saying that 10 years of easy money fed policy have layed the groundwork for inflation. All inflation is liquidity driven, to paraphrase far better economic minds than my own.

The amount of liquidity created in the last decade is staggering, both here and abroad. To combat their deflation the Japanese have been running their printing press longer and harder than we have; globally liquidity is through the roof.

My point was that the fed has been playing with fire for quite some time, and when it burns down the house they're going to try and stand there and look innocent.

BTW, if the market were able to efficiently price inflationary pressures into interest rates I think they would be far higher than they are right now. The only reason they aren't is because central banks (and highly leveraged hedge funds, but lets keep it simple), operating beyond market pressure, have absorbed a great deal of the excess capital created by the massive debt washing over the planet.

The thing to keep in mind though is, even they have they're breaking point.

Let me reiterate, I totally agree that inflation is bad. I also believe that higher interest rates are totally inevitable, and I would be thrilled to see them limited to pushing mortgage rates to 9 percent (short term). I'm not sure we're going to be so lucky.

Lindsey

6/08/2006 01:32:00 PM  
Blogger chicagofinance said...

"BTW, if the market were able to efficiently price inflationary pressures into interest rates I think they would be far higher than they are right now."

The market is liquid and efficient in this regard, and by no-arbitrage you can observe its collective implied expectations in the TIPS spreads to Treasuries.

6/08/2006 02:19:00 PM  
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