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.
Caveat Emptor!
Grim
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
11 Comments:
Keep up the good work Bernanke. the Last FED stooge Greenspam stuck you with a mess to clean up.
BABABABABABA
Bob
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.
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.
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
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
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
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.
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
"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.
Blogger is painfully sloooowwww today.
Inventory up another 200 in 2 days:
"Currently, there are 30,510 properties advertised for sale in NJ on our site. For Residential Properties that are Multiple Listed with Garden State, 99% are available to be searched on this site."
http://www.gsmls.com/
Hey, you have a great blog here! I'm definitely going to bookmark you!
I have a todays mortgage rates site.
Come and check it out if you get time :-)
Greetings.
Post a Comment
<< Home