In Peter Coy’s insightful post Will Housing Make Bernanke Cranky [BW], he discusses Goldman economist Jan Hatzius [BW] argument that the “soft landing” that has been described more times than can be legally be allowed will provide a significant drag on the economy, to the point where the Fed may actually be forced to drop rates in early 2007. Hatzius expects a full 1% cut in rates at that time.
The argument goes: housing is overvalued in many markets, construction will slow, stalling GDP growth and less people will pull cash out of their homes for spending.
However Bernanke may be reluctant to react too soon after taking over from Greenspan, which makes a case for the 2007 argument for change. Perhaps we can bank another refi boom like 1993, 1998 and 2004? Seems a little too soon for that to me.
Whats been amazing about this recent housing boom, is how the housing market has seemed to come out on the plus side after each economic condition gets thrown at it. With the supposedly weakening economy and build up of inventory, and if Hatzius’ assumptions play out, 2007 could be yet another good year for mortgages, boosting sales and refi’s. A rate drop would be key for that to happen though.
Perhaps I am seeing the glass as half full a little too much these days.