Ok, thats a little dramatic – semi-borrowed from an REM song. Still, the culmination of reports over the past week appears to confirm what most have known for the past six months: The Housing Boom Is Over.
What does that mean, exactly? Lets look at the stats: [WP]
New home sales fell 5% (4th decline in 7 months) [Commerce]
Backlog of unsold new homes hit a record [NAR].
Existing home sales fell 2.8% in January (4th consecutive monthly decline) [NAR].
Median sales price of existing homes $210,500 in January down from $219,500 in July 2005 [NAR].
43% of all new jobs created since 2001 are related to housing.
As a sign of more difficult times ahead, specifically in the real estate economy, analysts are beginning to raise their estimates as to how high the Fed will go until they feel inflation is in check. Consensus has been to either 4.75% or 5%. Lehman Brothers has just increased their federal-funds rate peak to 5.5% in August or September. They have not penciled in a policy reversal at any time in the next year and a half [Barrons]. Their reasons for the change:
although the housing market is cooling off, the process is slow and Fed Chairman Bernanke has reiterated the idea that the Fed will respond slowly to the cooling.
the economy is showing more underlying strength than we had expected. Therefore, it will probably take longer for the diminishing housing-wealth effect to overcome an even stronger underlying trend in growth.
In other words, no bursting housing bubble is seen by the Fed. They are focusing on the overall economy and not tinkering specifically with housing at this point (much to the disappointment of those who follow the housing market, I might add).
Tags: Ben Bernanke, Lehman
This is really something…I mean on one hand I think that with a new fed chief he would want to take things very conservatively and not ‘overshoot’ with raising rates too much; a sterotype Greenspan created in his years as chief.
Yet on the other hand I still see expensive oil and gold prices, these reports out of Lehman and Poole today, and I can’t believe that we very well might have 3-4 more hikes ahead of us.
Am I the only one that thinks that housing could be in some serious trouble if they raise the fed funds rate to 5.5%? What do you think?
Consider this: the BLS uses rents as the measure of inflation for both owner occupied and renter occupied housing, believing (correctly) that wide swingsin selling prices are asset speculation not the cost of housing as such.
So during the bubble, inflation seemed low and the Fed kept rates down, because neither Greenspan nor Bernanke believes in targeting asset prices in monetary policy — much to the disgust of The Economist magazine and other critics. Inflation seemed low because rents were depressed and held the overall rate back, as many took advantage of low interest rates to exit for the ownership sector.
Flip that around. As housing prices deflate, buyers hold out and keep renting because they don’t want to buy a depreciating asset. Housing rent growth, therefore, accelerates, pushing “inflation” higher. A falling dollar, as foreign investors get burned on MBS and pull back on U.S. purchases, also increases the price of imported goods. To Bernanke, therefore, inflation is moving higher, farther way from his 2% target.
He has a bad choice. Either he keeps raising rates to fight the inflation he can see. Or he admits that the policy is to ignore asset bubbles when the are inflating, but not when they are deflating, leading to a huge moral hazard and even more speculation.
Larry, with speculators stuck with unrealized losses on spec properties, and monthly costs on those properties, they will do the only thing they can: rent them to cover some of those costs until the market recovers enough to get out of the investment. That can only mean an eventual glut of rental properties, probably having a real impact in mid-to-late 2007 (my guess).