Wednesday, July 19, 2006

Ben Bernanke On Housing

Federal Reserve Chairman Ben Bernanke testified at Congress before the Committee on Banking, Housing, and Urban Affairs. At which he again used the term 'gradual cooling' to describe the housing market. Here is an excertpt of what he had to say on housing:

Outlays for residential construction, which have been at very high levels in recent years, rose further in the first quarter. More recently, however, the market for residential real estate has been cooling, as can be seen in the slowing of new and existing home sales and housing starts. Some of the recent softening in housing starts may have resulted from the unusually favorable weather during the first quarter of the year, which pulled forward construction activity, but the slowing of the housing market appears to be more broad-based than can be explained by that factor alone. Home prices, which have climbed at double-digit rates in recent years, still appear to be rising for the nation as a whole, though significantly less rapidly than before. These developments in the housing market are not particularly surprising, as the sustained run-up in housing prices, together with some increase in mortgage rates, has reduced affordability and thus the demand for new homes.

The slowing of the housing market may restrain other forms of household spending as well. With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past.
At least publicly, Ben Bernanke is solidly in the 'soft landing' camp. Where is his credibility when he says?
Some of the recent softening in housing starts may have resulted from the unusually favorable weather during the first quarter of the year, which pulled forward construction activity, but the slowing of the housing market appears to be more broad-based than can be explained by that factor alone.

Appears? The 'slowing' housing market certainly is much more then weather alone.

40 comments:

  1. David

    Inflation is still running too high-
    and BB will have to raise rates again next month- when some of the biggest Wall Street mouthpieces say inflation is too hot- what does that tell you? There is still too much liquidity floating about- and unless Bernanke raises rates, gold soars, the dollar crashes, and inflation rises anyway.

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  2. OK. I guess oil prices will come in for a "soft landing" too and the price will settle in where it is. Then everything will be normal again.

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  3. My forex account went up over 400$ today.

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  4. So no more throwing cash from helicopters?

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  5. The market took Bernanke to be dovish on inflation. Get thee helicopter ready!

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  6. I would take it that the economy is heading for a rough patch and helicopter pilot is going to pump and pump dollars, essentially destroying the rest of the dollar's purchasing power.

    Don't worry about the market, suckers are born every minute. The economies failure, will drive them down to hell.

    Bernanke will be fired by the next President.

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  7. Bernanke isn't dumb, and he usually thinks longer term than the markets, and certainly longer term than the press. He is essentially playing a game of financial chicken with the holders of some $8.5 T of US foreign debt. The major holders of US Treasury notes (Japan ~$700B, China ~$220B) are so large that if they sneeze, the world economy catches a cold.

    By triggering moderate inflation and raising interest rates, Bernanke is reducing the national debt in real terms, at the expense of the bond-holders. These bond holders will take the 20% hit and hold the bonds because they are so large that any hint of sell-off by these holders would affect their holdings worse than a moderate devaluation.

    By devaluing the currency in a controlled manner, it makes exports from the US more attractive to foreign buyers, imports more expensive, and could redistibute the allocation of resources in the market. Just look David's graph of the number of Realtors if you don't believe that there is a glut of people employed in the RE industry who could be (and were before the past few years) doing something ultimately more useful.

    Higher interest rates to compensate for this mildly inflationary stance should put some fear, uncertainty, and doubt into the housing markets and work to bring prices more in line with historical price to rent multiples. Rents will go up, housing prices will decline slightly in nominal terms, significantly in real terms, and wages will creep up along with other consumer prices. Does anybody remember the S&L collapse of the late 80s? Bernanke is trying to walk a fine line to avoid that scenario, and "distribute the pain" somewhat evenly to both lenders and borrowers. All the while he's trying to do it gradually enough so that the market doesn't panic. Bernanke is trying to engineer a "soft landing" in nominal terms.
    The real losers in this will be the holders of Mortgage Backed Securities, and anyone who overleveraged themselves to buy into RE.

    When the tide goes out, we figure out who's been swimming naked.

    teaparty

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  8. Well reasoned analysis teaparty.

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  9. Seriously, that's the best comment I've ever read on this blog.

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  10. The possibilty of such a 'soft landing' is no more then 20% at this point.

    The housing market is tanking, oil is too high, too much debt.....

    And he will raise rates again.

    For everything to fall into place as you have said is wishful thinking.

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  11. I’ve been a republican for years, Bush’s administration has certainly taught me a huge lesson. I'm voting Demo for the rest of my days.

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  12. This comment has been removed by a blog administrator.

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  13. great analysis Teaparty. and from it one can deduce that while "holders of mortgaged back securities" will be left holding devaluing assets, the other side of the coin is that the homeowners who owe on these same mortgages, will have had their debt reduced in real dollars if not in nominal dollars ... and will have actually been paid to live in their homes over the last few years ... Wait ... Redskins ... I've figured out how you can do what you've been wanting to do ... oh, never mind ... you'd never accept taking on a big mortgage ... even if it make your making lots of money off of doing that ...

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  14. Lance, I think you are saying I should run out tomorrow and buy as much house as I can afford and I will be paid to live there( effectively).

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  15. I didn't say that I thought it would happen, but rather that Bernanke is basically pulling all the levers he has in order to try to make that outcome happen, because it is ultimately in the best interests of most interested parties.

    Bernanke was handed a terrible task when he took over the reins as the Fed Chairman. He has to clean up the morning after the party. Greenspan lowered interest rates to record lows in order to attract foreign capital to the US equity markets in the aftermath of the late 90s stock bubble and attacks of 9/11/01. The unintended consequence of these rate moves was that it created a credit bubble, and that in turn created an asset bubble in housing. For a while, the credit/housing engine kept the economy going, but it is an ultimately unsustainable position.

    Bernanke would be negligent in his duties if he wasn't trying as hard as he can to guide this thing to an outcome that is most palatable for the US as a whole. Soft landing is a debatable topic, since everyone has a different definition of exactly what that is. My definition is that unemployment stays under 7%, and hyperinflation (>10% per annum) does not occur. The elephant in the room will be whether U.S. banks and lenders have adequate reserves on the books to offset the bad loans which are likely to occur.

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  16. Lance,
    It is true that the holders of these mortages could have their debt reduced in real terms by inflation, but the interest rate increase will likely happen much faster than wages can adjust, leaving the borrower in a pretty bad spot. If recent buyers are really stretched they may not be able to ride out the rate increases for wages to catch up. The key word is could. It could also be much worse. See Japan.

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  17. Lance bought at the top of the bubble in 2005, that is why he desperately wants to believe that the debt he owes will be lessened by inflation. Also Lance is a realtor, his income will dwindle to nothing unless the housing bubble can somehow continue. Home-debtor Lance will be one of those in a tight spot in this downturn.

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  18. That's why we love to call him "Bubbles" Greenspan.

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  19. Re Teaparty's analysis:

    Interesting analysis but you're short on specifics. To wit: the problem is that Greenspan lowered Fed rates too low and for too long for Bernanke to correct the problem in a "soft landing" sort of way.

    Specifically, the S&L crisis of the mid-late 1980's was brought on by a housing bubble involving not more than $150 billion dollars of malinvestment. But the malinvestment of the current housing bubble involves well over $2 trillion.

    The dynamic worked as follows:

    1. Greenspan began to lower the Fed rates after 9/11;

    2.individuals and firms were able to get access to cheaper and cheaper credit, taking that cheap credit as a (false) signal or go-ahead to "invest" in housing (it could have been tulips, but I digress);

    3.this increase in demand for housing caused house prices to increase;

    4. later, less savvy people (comprising most people), seeing prices spike, took this as a (false) signal to "get in or forever be locked out" of an investment and became buyers -- thereby massively increasing housing prices;

    5. as house prices rose beyond the income levels needed to purchase them, many of these house-buyers simply and unwisely bought with ARM's;

    6. the housing bubble burst sometime late last year when demand evaporated due to the (artificially inflated) prices that no amount of appraisal fraud or loan application fraud could get around;

    The vast majority of these later borrowers, who took out over $2 trillion in ARM's, are simply not going to be able to pay their increased monthly payment and neither will they be able to refinance because their house has declined in price.

    A soft landing might have been possible in, say, 2003. But we are way past that point now.

    But, still, you have an interesting analysis.

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  20. The market was up the last time BB spoke as well. Shortly thereafter he raised rates. My take on his speech to the committee was that he currently feels the economy can withstand another rate hike. It helps that he gets to use the government's own lying numbers to make a case for the strength of the economy. This way he gets to claim to be doing a balancing act for the sheeple. Of course the spendthrift congress knows what the actual score is.

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  21. The one thing that inflation can't wipe out is the oversupply of housing and depleted buyer pool we have in many places.

    Furthermore, the boomer generation will be retiring in the next few years or so, and they could be badly hurt by inflation - the real value of cash, bonds, and real estate will all be diminished by inflation. They won't have the protection of wage inflation.

    Bernanke has inhereted a bubble economy and, possibly, a huge amount of economic misallocation. What would we have benefited more from in the past 5 years, investing in energy techonologies or housing?

    There is no easy solution.

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  22. Well said. The economy looks like it hit its production peek in April and has begun sliding down this summer. Falling retail,Service and construction jobs are a good harbinger of a recession, which my business model depicts starting January 2007.

    Though, the recession could be a good thing for the US if it is handled properly by the market and the players(gov,Fed).

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  23. waiting for godotJuly 19, 2006 11:12 PM

    The run up in real estate was already happening before 9/11, and I doubt that this would have changed if 9/11 had not happened. The I/O Arms, Libor loans, and Neg ams were coming one way or the other. Add a douse of Clinton tax exemption up to $250k/$500k joint filing, and you further exacerbate the situation and invite speculators. If 9/11 had any effect, it was the flight to safety in the housing market, especially after the losses taken from the dot.com bubble.

    The question now is: will rents continue to rise because they are an affordable alternative to buying, or will the oversupply in housing cause rents to fall? If rents fall, and housing prices fall, then many are in for a big shock...

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  24. Aeronut asked ...
    "Lance, I think you are saying I should run out tomorrow and buy as much house as I can afford and I will be paid to live there( effectively)."

    Yep! I don't mean it'll happen right away ... But if we are going to have serious inflation (as I believe), then buy your house now with as much fixed debt as possible, and you will indeed be getting paid to live there in the course of 10, 20, or 30 years.

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  25. teaparty said:
    "Greenspan lowered interest rates to record lows in order to attract foreign capital to the US equity markets in the aftermath of the late 90s stock bubble and attacks of 9/11/01."

    now I too thought we were enjoying phenominally low mortgage rates here till I mentioned my low 5% mortgage rate to a relative in Europe last year ... and they kind of hem and hawed and then said, well that may be low for you, but our mortgages are more in the 3% range ... Now, if that is the case, how would we have been attracting foreign capital here assuming your assertion that lower interest rates attract more capital? which now that I am writing that, I have to question it ... wouldn't we want to be paying higher interest rates to attract more foreign capital? Why would foreigners choose to get less interest for their capital? I think as my example with Europe shows, if our rates were being manipulated, they were being propped up (and not down) in order to attract the foreign capital you speak of. Wow, imagine how many more folks could have bought had they not been propped up. At 3% interest, even Redskins would have been buying!

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  26. waiting for godotJuly 19, 2006 11:44 PM

    Lance,

    So you don't think inflation is abating as BB sugests; in fact, you think that we will have 10, 20, 30 years of inflation? Is this a wish list?

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  27. teaparty said...
    Lance,
    "It is true that the holders of these mortages could have their debt reduced in real terms by inflation, but the interest rate increase will likely happen much faster than wages can adjust, leaving the borrower in a pretty bad spot. If recent buyers are really stretched they may not be able to ride out the rate increases for wages to catch up. The key word is could. It could also be much worse. See Japan."

    I'm not following your argument. I mean, even if the wage increases don't come right away .. they will come eventually. The mortgage payment however will never change ... it will remain constant as wages go up ... (I know, this doesn't entirely apply to ARMs ... or to I/Os that reset in short time periods ... )

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  28. waiting for godotJuly 19, 2006 11:50 PM

    "Now, if that is the case, how would we have been attracting foreign capital here "

    The reality is that Foreign countries have invested in our debt as a function of the U.S. buying their imports. Their investment in US treasuries happens by default. In the end, it is a net sum zero. CA + KA + OR = 0

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  29. godot asked:
    "in fact, you think that we will have 10, 20, 30 years of inflation?"

    no, you misunderstood ... I mean, of course we're going to have 10, 20, 30 years of inflation (the money supply always gets increased to ensure there is at least a little more than needed out there to match economic output), BUT what I was referring to was that there is plenty of time for the lagging wages rises to come into play ... even if it is just at 3% to 4% per year (i.e., average inflation.) I suspect we'll only have high inflation for perhaps up to 5 years ... or a bit more. It just depends how much we are getting ourselves in a whole by spending for a war for which we are not taxing for ... Whatever that amount is, is the amount of inflation (over and above regular inflation) that the gov will pay for by "printing money" in one form or another ... As happened following similar circumstances after the Vietnam War.

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  30. waiting for godotJuly 20, 2006 12:16 AM

    I think we can all agree that there is a coming oversupply of housing in the form of condos in the DC/Metro area. Many of these will become rentals. Soon, there will be an absorption of these units. What will be the effect of this?

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  31. waiting for godot said...
    "I think we can all agree that there is a coming oversupply of housing in the form of condos in the DC/Metro area. Many of these will become rentals. Soon, there will be an absorption of these units. What will be the effect of this?"

    There was a article on this very subject about a week ago in the Post by an expert. (It got referenced in several of the threads here.) Basically, the bottom line was that the conversion of would-be new condo bldgs to apartment buildings would stem the coming severe rent increases, but not stop there. I.e., even with all the new housing coming on line, demand is still outpacing it. I think there was also reference to the condo market stagnating for a while there until things adjust. This makes very much sense to me. When I was selling my condo last year, I had 11 offers on it and it was only on the market a week. Even with twice as many condos on the market, not all remaining 10 offers would have a condo on the market available for purchase. (I.e., still greater demand than supply.) I think all this is reflected in the fact that condos are still selling ... and like for like condos (in similar neighborhoods) are still selling for more and more each month. (Initially over-priced condos in Fredericksburg or elsewhere are the exception here 'cause they've already exhausted all the foolish buyers willing to pay $500K for a condo in Fredericksburg when they can get a whole house for that out there!)

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  32. Lance said...

    "if we are going to have serious inflation (as I believe)..."

    Serious inflation could damage bond market that has direct impact on morgate rates. Higher mortgate rate means less affordability and we all know that could seriously hurt housing market.

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  33. If you own real estate, inflation is your friend.

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  34. va_investor said...
    "If you own real estate, inflation is your friend."

    ha! oh so correct! we need to remember though, that most bubbleheads have never made it past the point of looking for factors that will lower the initial buying price ... long term affordability (and profitability) aren't considerations for them at this point.

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  35. "If you own real estate, inflation is your friend."

    What if prices go up and wages stagnate?

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  36. Lance said: "we need to remember though, that most bubbleheads have never made it past the point of looking for factors that will lower the initial buying price ... long term affordability (and profitability) aren't considerations for them at this point."

    Neither is going deep in the hole - or adopting your style of faith-based economics, Lancey boy.

    Maybe we could see the value in buying nowadays, if we were real estate agents like you.

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  37. Anonymous said...
    ""If you own real estate, inflation is your friend."

    What if prices go up and wages stagnate?"

    They can't. Although things such as the rising price of gas help drive up inflation, the major driver is rising wages since most money in the economy is spent on labor and not raw materials. Now, can an individual's wages stagnate? Yes, but not everyones'. And that is the point I have been trying to make and none of the bubbleheads seem to be getting. We have been having inflation which because of the way the Fed measures things is not being reported. We have been having tremendous amounts of inflation as evidenced by the price of homes, gasoline, natural gas, etc. And for a lot of people, wages have been keeping pace with this tremendous inflation. Just like for a lot of folks, wages have not been keeping pace with the inflation ... leaving them relatively poorer and unable to buy the kind of house or condo they're expectations led them to believe they should be buying. It's a classic example of the rich getting richer and the poor getting poorer. Quit blaming the real estate agents, and the flipper, and thinking it's a bubble about to burst. Do you really think all the salaries that have skyrocketed in the last 10 years are going to go back down? Accept reality, buy what you can now, and content yourself with the knowledge that things are only going to get worse and at least you'll have secured your small piece of the American dream while you still can.

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  38. "Do you really think all the salaries that have skyrocketed in the last 10 years are going to go back down? "

    Where's your data to assert wages have "skyrocketed"?

    Lance, your last sentence isn't such a good sales pitch - it sounds desperate. Does it work for you when you try to sell real estate these days?

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  39. The real estate crash is inevitable. The speculators who over leveraged themselves deserve taking a hard fall. In fact, most bubble prophets are going to seriously enjoy it when many developers get stuck with millions of dollars in property.
    However, at the same time I think most bubble believers get a sick feeling in their stomach at the suffering that will be inflicted as home prices continues to fall over the next 3 to 5 years. Maybe longer--it all depends how rapid its decent to historical averages. I am sincerely sorry for the ignorant masses of the hard working common man who trusted the advice of their "professional" real estate agent, their "unbiases" appraisor, and the "intellegent" mainline media as they bought into a grossly over inflated home. Let's face it. Realtors set them up, appraisors and lenders loaded the gun, and a deceptive main line media pulled the trigger. I wish something could be done to help them but sadly they are still too foolish to sell right now and cut their losses. Instead, they are going to be slaves of the mortgage accumulating no equity for 10 or 15 years or else end up bankrupt. One job change or need to move will leave them without a financial future forever.
    A question is echoing in my mind as to whether anyone has figured out a way to use the free falling market to make money. I do not think puts in REITs are the answer and am a little sceptical about golds ability to climb indefinately to the sky. Any advice from brilliant investors?

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  40. The real estate crash is inevitable. The speculators who over leveraged themselves deserve taking a hard fall. In fact, most bubble prophets are going to seriously enjoy it when many developers get stuck with millions of dollars in property.
    However, at the same time I think most bubble believers get a sick feeling in their stomach at the suffering that will be inflicted as home prices continues to fall over the next 3 to 5 years. Maybe longer--it all depends how rapid its decent to historical averages. I am sincerely sorry for the ignorant masses of the hard working common man who trusted the advice of their "professional" real estate agent, their "unbiases" appraisor, and the "intellegent" mainline media as they bought into a grossly over inflated home. Let's face it. Realtors set them up, appraisors and lenders loaded the gun, and a deceptive main line media pulled the trigger. I wish something could be done to help them but sadly they are still too foolish to sell right now and cut their losses. Instead, they are going to be slaves of the mortgage accumulating no equity for 10 or 15 years or else end up bankrupt. One job change or need to move will leave them without a financial future forever.
    A question is echoing in my mind as to whether anyone has figured out a way to use the free falling market to make money. I do not think puts in REITs are the answer and am a little sceptical about golds ability to climb indefinately to the sky. Any advice from brilliant investors?

    www.forextradingadvisory.com

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