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Posts Tagged ‘Ben Bernanke’

Fed: Housing Dents Growth Which Is Like, A Major Drag

October 5, 2006 | 6:55 am | |

[Been a little light on Matrix this week because I released on 3Q 06 market report. Back on track next week.]


Source: WSJ

Fed Chair Bernanke gave a speech yesterday in Washington which was widely covered in the media and discussed in the article Housing Hurts, Bernanke Says [WaPo]:

As you know, a substantial correction is going on in the housing market,” Bernanke said, using stronger language than he had in recent months, when he described the real estate cool-down as “orderly.” The process is one of the “major drags causing the economy to slow,” he said.

The housing market weakened throughout the summer halving GDP from the first to the third quarters this year. He was unable to speculate how much weaker the housing market will get but that weaker housing hasn’t damaged the economy but will shave about a percent off of GDP from where it would have been, as discussed in the the article Bernanke Expects Housing Slide To Rein In Second-Half Growth [WSJ].

…the housing sector is undergoing a “substantial correction” that will likely shave about “a percentage point off growth in the second half of the year” from what it would otherwise have been “and probably something going into next year as well,”

Weaker economic conditions have been responsible for lower mortgage rates to date and the Fed chair sees further economic weakening into 2007.

Source: WSJ

Whats been surprising has been the continued strength of consumer spending. Business was supposed to take over the consumers drive of the consumption based economy, but that hasn’t fully been realized. Consumers got religion this summer to keep spending [BW] despite less equity in their homes or greater costs associated with tapping it.

The consumer theory was this: [WSJ].

So far, however, only half of that equation is panning out: Americans aren’t using their houses like ATMs as much as they once did. Even so, their willingness to spend hasn’t suffered, though economists don’t agree on why.

The theory is that average incomes are way up this year, about 8%, gasoline prices dropped, mortgage rates dropped, corporate profits are up and exports increased.

Another explanation is that the role of home equity and its importance was simply exagerated.

That makes more sense to me, in fact “housing” and “exageration” seem to go hand in hand.


[Getting Graphic] FOMC Goes Number 2, Mirroring The Housing Market

September 21, 2006 | 6:21 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s).

Click here for full graphic [WSJ].


Inspired by Greenspanspeak, and transitioning to Bernankespeak, the Wall Street Journal continues a well-executed tradition of graphically interpreting what the Fed really means.

The official press release [FOMC]

While there are some lingering concerns about inflation, the reduction in energy prices seemed to appease them but left open the option for further increases. For the second straight time, there was one board member casting a descenting vote for another 25 basis point increase, something that didn’t happen under Greenspan’s watch.

From their observations, it appears that they are acknowledging a weakening housing market by reducing the word “gradually” from the housing comment made in August. (see bold).

September Statement

The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.

August Statement

Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

With the state of the nation’s housing cooling rapidly, I am thinking that the FOMC may actually drop rates by their December meeting. They appear to have overshot their target by underestimating the effects their 17 rate increases on the housing market’s impact on the economy.

_August Statement Analysis_
Cooling Economy Makes FOMC Stop [Matrix]

_June Statement Analysis_
FOMC Makes It 17 at 5.25% And Seems to Get It About Housing [Matrix]

PIMCO: Biggest econ risk is U.S. housing [Businessweek]

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Bernanke Waved His Freak Flag High

September 14, 2006 | 12:01 am | |

Greenspan mastered language as Fed Chairman during his tenure which became known as “Greenspan-speak” where we hung on certain words in a sentence.

Current Fed Chairman Bernanke had a little difficulty initially but was able to create Bernanke-speak, a flavor of Greenspan-speak.

Why the initial stumble? Afterall he is known for his academic record:

  • Won South Carolina’s State Spelling Bee at 11 years old
  • 1590 out of 1600 on SAT exam (highest in the state)
  • Class Valadictorian

Carol Baum’s Bernanke’s Hippie Dictionary [Bloomberg] article reports that Bernanke created it as a high school junior. Perhaps this can give us some insight how he relates to the housing market as well:

Here are the highlights:

  • Dig — to like, to enjoy, as “The hippie undertaker digs his work.”
  • Down trip — a drag
  • Drag — a down trip
  • Hang-up — a neurosis or fetish
  • Lie-In — a form of peaceful protest that often fails when demonstrators go to sleep
  • Square — someone who stays home New Year’s Eve to hear Guy Lombardo play “Auld Lang Syne”
  • Straight — as in “stiff” (see “dig”)
  • Swing — what someone does who thinks Guy Lombardo is a football coach (see square)
  • Trip — a rocket flight without the rocket

Far out, like, I hope that like, this clears things up, man…dig?

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Low Rates Did/Did Not Fuel The Housing Boom

August 25, 2006 | 7:52 am | |

After getting over the trauma of learning Pluto was not a planet [Detroit FP] yesterday, I turned my attention back to the housing market.

Will the Fed raise rates, or won’t they? Its been an exhausting year trying to second guess them. It appears, as past experience dictates, they went a little too far and now housing is weakening more rapidly than expected. Now the Fed has to figure out how to get the nation’s economy out of its dependency on housing. They are discussing this and other issues now at their annual retreat in Jackson Hole. [Bloomberg]

Bernanke, Fed chairman since February, takes the Jackson Hole, Wyoming, podium today after two days of reports showing home sales and prices retreating after a five-year boom spurred by the strategy he advocated.

The results of that policy are now complicating his task as he attempts to maintain growth while wrestling down prices. Given real estate’s importance to the economy, the Fed may have to hold interest rates steady even as inflation exceeds Bernanke’s comfort zone of 1 percent to 2 percent, excluding food and energy.

There have been some interesting Fed studies over the past year, with mixed messages and some contradictions. Here are two examples:

Falling Rates Fueled Housing Boom: A Trend and Variance Decomposition of the Rent-Price Ratio in Housing Markets [pdf]

Housing Prices May Become More Volatile, Fed Report Says [WSJ]

The rise in housing prices over the past decade “owes significantly” to falling inflation-adjusted interest rates and changes in the mix between rates and the “housing premium,” which could mean more volatile home prices in coming years, according to a paper written by Federal Reserve economists.

Economic Fundamentals Fueled Housing Boom: The great turn-of-the-century housing boom [pdf]

The Chicago Fed says that low mortgage rates did not fuel the real estate housing boom. Spike in housing is no bubble, Fed says []

“While we have so far mostly avoided discussing housing prices, our findings do suggest that to the extent that house prices have grown considerably in recent years, this is not due to unusually excessive speculation in the housing market, such as would occur in a bubble. Instead, our findings point toward the high prices being driven by fundamentals.”

[Of course low mortgage rates fueled the housing boom -ed]


[Matrix Zeppelin Series: Readers Write] Thoughts About Trolling For Crazy Prices, Phantom Listings And Causation

August 9, 2006 | 10:11 am | |

August should be a slow month for real estate commentary as people take time off to relax, assuming they are not melting as the sun seems to be crashing to earth. Matrix readers however, have been cranking up their air condtioners and reflecting on housing related economic changes.

Throwing caution to the electric power grid, here’s a few notable comments from the Matrix Zeppelin:

  • When housing prices were going through the roof, the FED kept interest rates low, based on the fact that “inflation,” which uses rents as the basis of housing costs, was low. Greenspan and then Bernanke made the case that the FED should focus on inflation, not asset prices (like the price of owner-occupied housing). How that housing prices are softening, but rents are rising, it appears the measure of inflation is shifting to the former. Bottom line: policy is inflationary. Governments, households, and (if you include pension liabilities) businesses are deep in more debt than they can service. Those debts cannot be paid in today’s dollars. The options are a reduction in the value of the dollar, which is to say inflation, or mass default. The hope appears to be that inflation will bring nominal income up to the level required to support today’s housing prices and credit card debts. The problem: lots of the debt is variable rate. But someone seems willing to lend for 30 years for no more than the return on cash. Amazing.

  • …allowing for inflation and a weakening dollar just to rescue those who got into real estate over their heads. I’m not certain why anyone should feel responsible for their behavior anymore, if the government is just going to come in and clean up their messes for them.

  • I wonder if any meaningful proportion of the residential listings currently on the market are sellers who are not serious and/or are “trolling” for a crazy price. I know several people personally who have their apartments listed but whose selling is strictly optional (meaning, they don’t have to relocate, don’t need a larger space for more kids, etc.), and their pricing reflects their flexibility. They offer what they consider to be a “score” price, meaning if they sold it at that they’d be very happy with their returns. That might be one of several contributing explanations to the reduction in sales volume without a related reduction in prices, a phenomenon you’ve mentioned several times and this article [CNN/Money] reminded me of again.

  • One could hypothesize that there is currently a greater proportion of such listings in the total, due to the widespread perception over the past year that the “bubble” was peaking. That might account for a bit of “phantom” inventory in comparison to previous eras. One could then extrapolate that the inventory growth or level was somewhat exaggerated.

  • The WSJ journal incorrectly states that the boom began in 1991. However, prices in many places were in decline for several years after that. Their chart shows that the decline in sales activity stopped getting worse in 1991, but remained below the long term trend until 1998. I would pick that point as the start of the “boom.” Until then it was merely a weak recovery.

  • Your use of the term “stagflation”, two days in a row make me want to go out and find a used AMC Pacer to buy.

  • I believe between 2002-2004 we were all playing in a market that never really existed. With the correction of compliance over appraisals we are now starting to see who we can start pointing fingers at.

  • Low rates and exotic loans allowed people who could not purchase in the past the chance to buy a home. But eventually, prices (in certain areas) ran much higher than median incomes could afford. And now we have the market slow down and eventual correction. How the correction will play out… I really don’t know. I think many like to point to RISING mortgage rates (and will do so more and more) as the cause of the housing slow down, but I think it was the low rates (and exotic loans) that ACTUALLY caused it.

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[Getting Graphic] Cooling Economy Makes FOMC Stop

August 9, 2006 | 6:38 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s).

Click here for full graphic [WSJ].


Inspired by Greenspanspeak, and transitioning to Bernankespeak, the Wall Street Journal continues a well-executed tradition of graphically interpreting what the Fed really means.

The official press release [FOMC]

There have been some inflationary signs recently with rising energy costs, concerns about supply and core inflation has risen as well (inflation without food and energy). However, the fed indicated that these will work themselves out and did not raise rates. The first time the fed has paused after 17 consecutive 25 basis point increases since June 2004.

Basically, their observation on housing was consistent with June but the overall economy has essentially changed. I’d venture to guess that the economy changed because housing kept doing what its been doing over the past 2 months and was the primary catalyst for the economic change. Its interesting because the fed seems to be saying from their position that housing didn’t deteriorate further since they used the exact same language in the statement (see bold).

August Statement

Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

June Statement

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

With the state of the nation’s housing, it is sure looking like rate cuts in 2007.

_June Statement Analysis_
FOMC Makes It 17 at 5.25% And Seems to Get It About Housing [Matrix]

_Why this might mean the end of rate increases for a while_
Why a Pause in Rate Cycle Is Apt to Be the End: Caroline Baum [Bloomberg]

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Fed Is Looking Down The Road Now, Not Just Over The Hood

August 7, 2006 | 6:16 am |

Neil Henderson’s article Secret of the Up-or-Holding Rate: Tuesday’s Fed Mystery Theater [WaPo] provided an excellent analysis of how the Fed has changed its communications with investors from short term to long term clues.

In the Greenspan era, everyone seemed to be on the same page about what sort of rate change was going to be made at the next Federal Open Market Committee meeting.

In public appearances, Bernanke gives the goal but not the mechanics.

In mid-July, he outlined the collective goal of the policymaking Federal Open Market Committee: a so-called “soft landing” in which the economy slows down just enough to tame inflation without sliding into recession.

The forecast represents what the policymakers expect to happen if they adjust interest rates just right — without saying specifically how they will do so.

This approach is called “inflation forecast targeting” by Fed economists and academics.

No clues have been provided by FOMC members because they don’t really know going into this meeting what the consensus us. The San Francisco Fed President said in a speech that she would favor a pause [FRBSF] because if inflation starts to respond to the rate cuts, they have overshot the market but thats hardly the consensus.

The Fed Futures index indicates a 60% chance the Fed will pause tomorrow. On Friday 17 of 22 major Treasury bond dealers polled by Reuters were telling their investor clients that the central bank would hold its benchmark short-term rate steady at 5.25% when policymakers gather Tuesday. [LA Times]. If true, this would be the first time since May 2004 that no rate rise occured.

The weak jobs report last week [Barrons] seemed to make the odds much better. For the past six weeks, treasury yields are their lowest in 6 weeks (yields down = bond prices up) as investors have been fighting to buy the bonds. However, the end may be near as the market has been over-speculated and rates may nudge up a little. Even so, the 10-year has dropped from about 5.2% to about 4.9% over this period. In some local markets, dormant as of late, have been showing some signs of stirring even though its summer. Rate fluctuations bring people in and push them out like the tide.

As far as housing is concerned, slightly weaker rates is a mixed blessing since it comes primarily from a weaker job market. You need income to buy a house. Short term Fed trends won’t undo the damage caused by long terms trends but its a start.

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Sense of Direction: GDP Easing, Housing Cooling and The Rise Of Lawn Indicators

August 1, 2006 | 9:45 am | |

There are some signs that business is trying to pass along other costs to the consumer. Core inflation is up. With mortgage rates up since the first of the year, that leaves less room for a mortgage payment. And that is what has tempered demand – this is no new news to anyone, really. Yet there seems to be a sense of optimism that things will work out, without widespread carnage.

It would seem that the Fed has overestimated the willingness of business to take the baton from the consumer. Profits and cash are better but business is not spending with wanton abandon like consumers did.

Here’s a bunch of varying commentary concerning the housing market and overall economic conditions. Its fair to say that the pace of housing sales is declining and the economic conditions are slowing, the government keeps revising its initial housing stat releases downward, but beyond that, the devil is in the details.

In Caroline Baum’s opinion column this week Fed May Get What It Bargained for — and More [Bloomberg]. The Fed by instituting a 425 basis point increase to the federal funds rate since June 2004, is beginning to reap the rewards of its efforts. The economy is cooling. One of the primary reasons for the cooling has been the housing market, but also consumer spending on durables, investment in equipment and software.

That wasn’t the new or most important news last week, however. The Bureau of Economic Analysis also reported that real gross domestic product grew 2.5 percent in the second quarter, down from 5.6 percent in the first.

That surprised analysts who were expecting 3% annual growth.

In Fed’s the grand scheme of things, the burden of economic growth was supposed to pass from the consumer to business. But that does not appear to be happening.

However, despite a slowdown in GDP, core inflation (excluding food and energy) rose to an 11-year high in June [MW] which keeps the pressure on the Fed to keep raising rates.

While consensus seems to be 50/50 for the Fed to pause in August, I believe that its going to be one and done. I believe the fed overshoots by about 2 rate movements as it relates to housing. Possible rate reductions in 2007 are on the horizon. I wouldn’t get too excited since the damage has already been done to the housing market.

In Kenneth R. Harney’s The Nation’s Housing column this week Decoding Fed Speak On the Market’s Path [WaPo] he interviews David Berson, chief economist for Fannie Mae who also has his own column.

In reference to housing, Mr. Berson says:

One of the few immutable laws of economics is that “unsustainable trends eventually come to an end.” And the end of the trend is pretty much where we are right now in housing.

Ben S. Bernanke, chairman of the Federal Reserve, was more opaque. In congressional testimony last week, Bernanke said, “The downturn in the housing market so far appears to be orderly.”

In Berson’s Weekly Commentary column [Fannie Mae] this week, he writes:

Even with the declines in housing activity, and our forecast of an 8 to 10 percent decrease in home sales, we are still projecting that 2006 will be the third strongest year on record for home sales. We expect waning investor demand to drive most of the decline in housing activity, but the fall will be cushioned by strong demographics.

Remember last month when the Census Bureau reported that new home sales increased by 4.6% in May that confused us all? That number was revised down to a 0.5% in the latest release. The lesson: _don’t rely on new home sales data when first released (if at all).

In Toddie Gutner’s Housing Prices Stronger Than You Think [BW] she cites an incredibly optimistic housing report that she deemed refreshing because everyone else is pessimistic. (However, refreshing needs to have some basis of logic. – love the comments to her post.)

For extreme pessimists, there is something for everyone this week. In Rick Ackerman’s “For Sale” Signs Will Trip Crash [Goldseek], he observes a silent crash in real estate. If you want to pull out all the stops and cram as much gloom and doom into one column, then this is the one.

Although prices have yet to sink, except in such formerly white-hot markets as Miami and Las Vegas, the mushrooming inventory of unsold homes nationally implies that a broad and precipitous decline is gathering strength. For the time being, though, we can expect a growing number of homes to sit on the market for longer and longer until either of two things happens: sellers lower their prices, or buyers raise their bids.

Actually, it won’t be a splat that causes sellers to panic, but rather a certain, unpredictable threshold at which “for sale” signs on neighbors’ lawns become sufficiently numerous to induce a cold sweat.

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Oh, That Boring Housing Bubble

July 25, 2006 | 10:24 am | |

The Business & Media Institute observes in their article Housing Bubble, What Housing Bubble? CNN says Bernanke’s comments about orderly decline in home sales are ‘boring’ [Bus Med].

Instead of worrying about the burst of the “housing bubble” you might as well watch paint dry or your grass grow. CNN’s “American Morning” is no longer forecasting doom and gloom for the US housing market. On July 21 Gerri Willis declared the latest housing market news “kinda boring.”

Back in March 2006, CNN reported:

If you are worried about the housing bubble bursting, sell, sell, sell, it’s a sellers market.

Bernanke testified before the Senate Banking Committee [Reuters] last week and failed to use the phrase housing bubble. Rather, he said that the housing downturn appeared orderly [BW].

In addition [Bloomberg]:

Bernanke forecast slower economic growth and an easing of inflation, which a government report this week showed rose for a sixth consecutive month. In his testimony, the chairman, 52, signaled he’s open to suspending the Fed’s two-year campaign to increase rates; minutes of the Fed’s June policy meeting released yesterday showed officials unsure of their next move.

It looks like the housing bubble discussion has moved to the back burner. If its not an exciting activity where records are being broken or tragedy strikes, then readership of real estate articles will likely diminish over the next year.


Matrix Readers Take: The Housing Economy

July 11, 2006 | 5:59 am |

[Periodically, we’ll start providing a salient comment summaries by Matrix readers ’cause they have a lot to say -ed]

Common Sense: Inflation is rising rapidly because the CPI bases its housing cost component on rents, which are also rising rapidly. With sales prices leveling off, if the CPI used those prices as a surrogate for the cost of owner occupied housing, inflation would seem lower and there would be no need to raise rates.

HOWEVER during the bubble, as people exited rental units for owner occupied housing, rents were depressed, and that kept the CPI down. Yet if you did not own a home and wanted one, your cost of living soared — due in part to the effect of cheap credit –and the CPI did not reflect this.

If the FEDs stop now, it would in effect have ended up using whatever measure of housing price inflation would make the CPI seem lower, and would have ignored housing price inflation on the upside and reacted to it on the downside — a Bernanke put. The result will be inflation and (yet another) transfer from younger generations to older onces.

Housing price affordability relative to income is going to have to be restored, folks. There aren’t enough very affluent people willing to live as if they were poor for 40 years paying off 40 year mortgages to support the current prices. We’ll either have to have inflation, allowing at least some people’s income to catch up with today’s prices, or price cuts, or both.

BTW, if the FEDs cut interest rates to support housing, foreigners could stop buying U.S. bonds, the dollar could tank, and rates could soar anyway.

Candor: As a developer, I’ve certainly benefitted from the generous amount of money in the marketplace seeking out a real estate investment. I had not considered the increase in mortgage brokers as a source for looser underwriting standards, however. Certainly here in DC, mortgage brokers are still looking to fill desks and keep placing loans, but I think the FOMC is right: it is the astonishing amount of money that is now in the industry is leading to looser underwriting standards. Blackstone just closed a huge portfolio, and many, many other companies are finding similar success. Unfortunately, there just are not that many good projects out there that provide the returns these companies are seeking. That means either return the money, look much, much harder for properties, or ‘tinker’ with the revenue projections. About five years ago, Sam Zell spoke at the NYU REIT conference about the maturation of real estate into ‘yet another investment asset’ and the unimaginable amount of money that would bring. He felt it would continue to be hard to place the money, but that those owners who ran their properties like more traditional investments (ie no reciepts in a shoebox) would reap the benefits.

Insight: Wait, isn’t the most important statistic the one that says the number of condo sales were down 15%, compared to second quarter, 2005?

Or, was that decrease in condo sales offset by an increase in co-op sales? I don’t see much in any of these reports about actual number of sales, only about average price of properties and inventory levels.

Compassion: I think a lot of people are OK financially. BUT, job uncertainty seems higher. It is pretty easy to find some one who is just as skilled and talented and doing worse (and better). I think the anxiety comes from a recognition of how easy it is to fall off of the ladder and how badly it would hurt.


[Getting Graphic] FOMC Makes It 17 at 5.25% And Seems to Get It About Housing

June 30, 2006 | 6:40 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s).

Click here for full graphic [WSJ]

The official press release [FOMC]


Inspired by Greenspanspeak, and transitioning to Bernankespeak, the Wall Street Journal continues a well-executed tradition of graphically interpreting what the Fed really means.

Inflation is a concern but they don’t seem as intent on raising rates indefinitely. August is looking pretty definite as far as rate increases go.

The federal funds rate has been raised 17 consecutive times since June 2004 by 25 basis points and is at its highest level in 5 years [WaPo].

As a relief to many, the FOMC specifically recognized that housing does play a significant role:

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

I still contend that the full thrust of the cooling of the housing market is not fully borne out in the stats and we are headed for more economic weakness in 2007. The use of the dreaded “R” word will accelerate. Merrill Lynch economists say there is now a 40% chance of a recession in 2007 [Calculated Risk].

That could mean rate cuts next year but thats only good news to housing if job creation doesn’t deteriorate too much.

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List-o-Links: Debt, Costs and Prices

June 12, 2006 | 12:01 am | |

Here’s a mish-mash of articles that didn’t make it into Matrix as a post, but they are worth a look.

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