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Posts Tagged ‘Ben Bernanke’

MDO: Its Not How Much You Have, Its How Much You Can Borrow, And Other Observations

March 21, 2006 | 12:01 am |

In Berson’s Weekly Commentary: Mortgage Debt Outstanding (MDO) growth in 2005 — exactly the same as 2004 [Fannie Mae] he reviews the Fed’s Flow of Funds statistics for 2005 and he found the following:

Warning: Berson’s link lasts one week. For an acrhive of stories including this one go here.

  • US households borrowed using home mortgages at the same growth rate in 2005 as they did at 2004.

  • Pace of increase slowed in 4th quarter of 2005.

  • Growth rate was 14.2% annual, the 4th consecutive year of double-digit growth.

  • Home equity grew 15.9% in 2005 and was at highest rate since 1979.

  • Debt to value decline slightly from prior year but higher than 10 years ago.

What’s expected for 2006?

  • Lower home price appreciation and a lower volume of home sales and refi’s is expected to lower rate of MDO growth.

  • Fannie Mae expects a surge in home equity lending.

In other words, property owners are expected to continue to borrow against their properties in significant numbers this year. This makes the direction of mortgage rates a significant barometer for national economic health. Fannie Mae is (obviously) pro-lending, so I would think that lending will (and has) dropped significantly, reflective of the lower number of sales and less attractive refi terms.

Its not clear to me how mortgage origination can sustain nearly double digit growth in 2006. Its not logical, unless mortgage rates fall, which is hard to imagine with the Fed projected to raise short term rates 1-2 more times.

Its unlikely to expect long terms rates to fall in the immediate future, so the best-case scenario for the housing market is to hope for Goldilocks Not too hot, Not too cold [Matrix] and have rates remain where they are.

Fed Chairman Bernanke was quoted today as saying [CNN] essentially that the economy remains strong, despite what is happening to housing which probably means the Fed will continue with belt-tightening 1-2 more times. I think low bond yields (low mortgage rates) are more about our balance of trade with China than anything.

…long-term rates could suggest the level of short-term rates consistent with holding the economy at full employment had declined, perhaps reflecting a lasting drag on the economy from high energy costs, slower growth in house prices and the possibility consumers will begin to save more.

But he also noted long-term rates were low around the globe and said “an explanation less centered on the United States might be required.” One other factor that Bernanke raised, but downplayed, was that large official holdings of U.S. Treasury debt accumulated by countries intervening in currency markets was doing much to push U.S. long-term rates down.


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Beige Book Says Goldilocks Is Still Not That Hot

March 16, 2006 | 12:01 am | |

In the Fed’s ‘Beige Book’ Finds Continued Economic Growth [WSJ] article, Economic activity “continued to expand” in most of the U.S. Federal Reserve’s 12 regional districts in January and February and employment strengthened, but labor costs and retail prices remained under control, the Federal Reserve said Wednesday.

The Fed said that business contacts “generally reported ongoing input cost pressures,” with energy prices “mentioned frequently.” However, those pressures didn’t appear to spill over into consumer prices, with the Fed stating that “prices at the retail level increased at only a moderate rate.”

Here’s the Federal Reserve summary [FRB]

The Fed’s rate-setting Federal Open Market Committee is due to meet March 27-28, with analysts expecting new Fed Chairman Ben Bernanke to oversee a quarter-point interest rate rise to 4.75 percent. Job creation and other economic data in recent weeks have been strong and many economists expect rate hikes this month and again in May to keep inflation risks under control [Reuters].

In other words, they painted a picture that the optimal Goldilocks Economy: Not Too Hot, Not Too Cold still seems to be in place. Since the next FOMC meeting at the end of this month may be one of the last two rate increases, which could take pressure off of the housing market by stabilizing mortgage rates. Its still a Catch-22 however, because the expected rate increases will keep inflation in check but inflict more damage on the housing market, which has the potential for more significant economic damage as a result.

It sure seems like the Fed goes two rate increases when it comes to housing. Obviously, thats not their sole focus but in this situation, it would appear to be more important than ever.

Both long term and short term rates have upticked lately tempering volume and has cause a reduction in the number of sales and tempered or caused a decline in housing prices in many markets.

_Of interest_
What is the Beige Book and why is it Beige? Economically Speaking, Its Beige [Matrix]


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The Housing Boom Is Over And Economy Feels A Little Too Fine (Thats The Problem)

March 7, 2006 | 12:01 am |

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].

  • Foreclosures are rising [Big Picture]

  • 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).


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The Fed Observes The Europeans: What To Do With Housing?

March 1, 2006 | 12:01 am | |

With Bernanke’s stewarship of the Fed underway, I have wondered if the Temple was paying short shrift to the impact of the weakening housing market on economy. Comments made by Bernanke seemed to indicate that housing was doing just fine. Everyone knows (who follows the real estate market) that a change has occured as evidenced by the fourth successive monthly decline in new housing sales [BW].

In the article Fed Finds Overseas That Even Steady Home Prices May Hurt Growth [Bloomberg] the red-hot U.S. housing market showing signs of coming off the boil, Fed officials are again looking abroad for hints on what lies ahead for the U.S. This time the focus is on Australia, the U.K. and the Netherlands, where home-price advances peaked after housing booms that had significantly spurred economic growth.

The lessons learned?

  • A bust doesn’t always follow a boom.

  • Prices that are not rising – they can stay flat or decline – can have a significant negative economic impact.

What patterns were seen? Within a year and a half after markets peaked in the Netherlands, Australia and Britain, prices in all three had stagnated, hitting homebuilding, consumer confidence and spending.

  • Britain – prices rose 20% in 2004 and have remained flat since.

  • Australian – prices peaked in 2003 and have remained flat since.

  • Netherlands – prices peaked in 2000 and have remained flat since.

Economic growth in these countries was about half within a year after the housing markets cooled.

Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, says the Fed might have to take similar action. He forecasts U.S. economic growth will slow to 2.6 percent next year from 3.4 percent this year. The Fed, he says, will stop raising its target rate when it gets to 5 percent and will lower it a full percentage point next year to cushion the economy from the fallout of the housing slowdown.

If his theory sounds vaguely familiar…
A Weakening Economy (If It Is), Has The Makings Of A Refi Boom In 2007 (If It Does) [Matrix]

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FOMC Sees Mortgage Rates Effect On Housing As A Conundrum-22

February 22, 2006 | 12:01 am | |

In Greg Ip’s article Fed Minutes Indicate Inflation Still a Worry for Some Officials [WSJ] he indicates that The Federal Reserve sees that the risk for future inflation could rise over the next few months influenced primarily by energy costs but that this effect was not considered to be long term and seem to have 1-2 more increases to go.

View the minutes [FOMC]

Bernanke did not attend this meeting but his testimony was consistent, except for housing where the FOMC seemed to have more concern about housing than he does.

The minutes showed a higher level of concern about the housing market than Mr. Bernanke indicated at his testimony last week. “In some areas, home price appreciation reportedly had slowed noticeably, highlighting the risks to aggregate demand of a pullback in the housing sector,” the minutes said. Some officials thought the effects of an end to rising house prices were “potentially sizable,” and could be compounded by rising debt-service costs as variable-rate mortgages are reset at higher rates.

The issue of housing and its significant impact on the overall economy is a Catch-22 since rising short term rates cool off the economy, and is largely being done through the housing market as a conduit. At the same time, if inflation is not kept in check, long term rates will rise, also cooling off the economy through the housing market.

Its a Conundrum-22 if you ask me.


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Mind Their Behavior, Real Estate Economics Is Not All About The Numbers

February 20, 2006 | 12:01 am |

I am often struck by the volume of data that has been dissected, analyzed, processed and examined during the transition period that the housing market seems to be going through. Yet I often have the impression that the public is no more informed than before. Perhaps thats because we could be missing one important element: behavioral economics. Greed.

In the article Lunch with the FT: The man and the bubble [FT], Jim Pickard has lunch with Robert Shiller, the well-known Yale economist who wrote the book irrational exuberance and predicted the NASDAQ correction 5 years ago. Professor Shiller is someone I admire greatly, have had the pleasure of meeting and corresponding with, and have been a big fan of his work for sometime. This is what he thinks about the current state of the housing market:

Bernanke thinks there is no housing bubble,” says Shiller. “According to the White House website, he said recently that the fundamentals explained house price movements except in some speculative markets.” The new chairman of the Fed is a “brilliant man”, Shiller continues, but he has not shown any interest in behavioural economics.

And this is where he has underestimated the danger posed by real estate speculation. “He is not attuned to one of the great innovations of our time, that is, bringing psychology back into economics.

Here we come to the crux of Shiller’s theories about asset bubbles, whether tulips, shares or property: people get excited as they see the price of an asset rising, so they buy more, which pushes the prices up further until they are unsustainable. “The bubble is made by a ‘story’, by excitement and glamour,” he says. And then, once a market loses that momentum, it will experience negative feedback, where people rush to sell before things worsen further

the number crunchers have ignored the bigger picture

One striking theme within Irrational Exuberance is Shiller’s preoccupation with greed. He writes about the 60-fold rise in gambling in the US since 1962 and suggests that this new-found appetite for risk has spilled over into how people approach investment. The real estate bubble, he argues, has simply replaced the last stock market bubble as the focus of people’s avarice.

Besides, who gets to claim victory if the housing market does crash? Since the Economist magazine (which I subscribe and enjoy) has been calling the crash for about 4 years, Shiller for about that long, Bubble blogs as well as others. Who gets to lay claim to “calling it?” if something bad happens?

Shiller makes an interesting point and gambling really is everywhere [Seth Godin’s Blog] – Powerball – look at the new poker craze on television – seemingly paralleling the housing boom, however, I am not sure I agree with his attempt to actually call a crash. It makes me wonder whether a component of a crash, are the influences of experts who try to call it. Sooner or later participants in the market can actually start to believe it, doubt enters the fray and…crash – classic self-fullfilling prophecy stuff.

His theory seems to assume that a run-up in values of an asset class can only end in disaster because of human nature. I think that a weakening housing market does not necessarily behave like a weakening stock market. Housing prices are sticky on the downside, yet stock values can evaporate overnight. Housing bubbles are localized and are subject to different influences in different markets whereas stocks are much more efficient.


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A Leaky Roof But Housing Market Remains At Watershed

February 17, 2006 | 12:01 am | | Public |

In Howard Gold’s Fighting The Tape column Is It Crunch Time for Housing? [Barron’s], he suggests that this spring determines how the residential housing market, which is one of the key contributors to the economic recovery, will behave over the next several years.

The points he makes are:

Inventory is up [WSJ]
Toll Brothers reports a 29% drop in orders

Mark Zandi of Economy.com writes: I don’t think nationwide you’ll see a bust,” says Mark Zandi, chief economist of Moody’s Economy.com. But we might in certain markets, he adds — the usual suspects like Miami, Las Vegas and Phoenix.

(and we can’t omit moi)

This is a watershed moment,” says Jonathan Miller, president and chief executive officer of Miller Samuel, a large New York real-estate appraisal firm. “If we’re going to see trouble, it’s going to be over the next 12 to 18 months.

What I mean by this is the following: Bernanke indicated today that the economy is very strong and so is housing. It has been speculated that he has at least two more rate increases in store for us until he takes a breather. That will further weaken the housing market as things continue to get more expensive for the ARM mortgage customers who largely financed the housing boom.

It’s a three- to five-year cycle on the downside,” says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. Rosen calls himself a real-estate bear who endorses the doom-and-gloom scenario of Yale University professor Robert Shiller.

We’ve already passed stage one, characterized by “a falloff in new sales and orders,” says Rosen, and are just entering stage two, in which unsold inventories build up.

Inventory and mortgage rates are the key concerns.

In Nicholas Yulico’s article Housing Starts Explode [TheStreet.com], January new housing starts increased 12.8% above December. Initial reactions from optomists said that this was evidence that the housing market was back. Actually, the surge was due to unusually warm weather for December which enabled builders to build. This will compound inventory problems since inventory was already rising without help from new construction.

(In the Barron’s piece, I close out with moi)

“The boom is over,” declares Jonathan Miller. That perception no doubt has begun to trickle down to prospective buyers and sellers

Its a bit dramatic but its taken about 6 months for many in the real estate market to come to terms with this.


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Just Gimme Shelter (‘Cause I Am Not Sure I Can Buy It)

February 16, 2006 | 12:01 am |

Nick Godt’s Shelter Glut Could Prove to Be Bubble’s Demise [TheStreet.com], speculates that the rise in housing starts in January over December, was due to warm weather and also helped stimulate consumer spending. This has been taken as a sign that housing is cooling slowly.

In fact, all it means is that the inventories of new homes is going to get larger. How about demand?

Demand is primarily about mortgage rates.

Today Bernanke did warn that “slower growth in home equity, in turn, might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated.” This, Bernanke went on, was one of the main risks to the Fed’s upbeat assessment that the economy will grow at a 3.5% rate in 2006 and at 3% to 3.5% in 2007.

But Wall Street was unmoved, having already factored in that this scenario will probably mean one or two more hikes this year, which would take the Fed’s key rate to 5%.

Bernanke believes that mortgage rates will remain low enough to keep the housing market stable.


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Bernanke Comments While Greenspan Gets Paid

February 16, 2006 | 12:01 am | |

Bernanke’s first presentation before Congress as Fed Chair indicated that interest rates may need to go higher.

Text of Bernanke’s testimony before House panel [MarketWatch]

The WSJ provided some analysis of his remarks before congress today Bernanke Sticks to Fed Line, But Offers Some New Hints [WSJ].

Some cooling of the housing market is to be expected and would not be inconsistent with continued solid growth of overall economic activity. However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely. Slower growth in home equity, in turn, might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated. To some extent, sizable increases in household wealth, as well as low interest rates, have contributed in recent years to the low level of personal saving. … Over the next few years, saving relative to income is likely to rise somewhat from its recent low level.

For a good post on his speech, go to econobrowser

Bernanke basically indicated that he will continue to be an inflation hawk and may have to reign in a strengthening economy. He will watch over housing carefully, but it sounds like a few more rate increases are in store for us, which will likely mean slightly higher mortgage rates. There had been some speculation that the fed was done with its poloicy of measured growth. If the economy is indeed growing and getting stronger, then the Fed will raise rates to stem inflation, housing values may be impacted by rising mortgage rates and consumer spending could slow sharply, perhaps forcing the Fed to drop rates at a later date.

In Bernanke takes the stage [Chicago Tribune], the reporter indicated that “Bernanke wound up defending Greenspan] for recent speeches the former Fed chief has made on economics in Tokyo and New York for a speaking fee reported to be as high as $125,000. In one instance, Greenspan’s reported remarks showing concern over the housing market had a brief impact on financial markets.”


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Inverted Yield Curves, GDP And A Goldilocks To Make Our Heads Spin

February 14, 2006 | 11:51 am |

In Berson’s weekly article Is the shape of the yield curve telling us that there will be a recession in 2007? [Fannie Mae] he explores the inverted yield curve. A flat or inverted yield curve has been a hot topic as of late because historically it has been a warning sign that the economy could be headed towards recession. Typically the yield for shorter term securities is lower than long term securities. The Fed’s measured growth action has caused short term borrowing costs (such as adjustable rate mortgages) but at the same time, long bond investors are comfortable that the Fed is keeping inflation in check, or as a few people have suggested, risk has not been adequately reflected by the market in the current low level of rates (ie fixed mortgages).

So will it be different this time? Is the Goldilocks [Matrix] scenario “not too hot, not too cold” unraveling?

Lets play _what if_

Popular opinion seems to be that an inverted yield curve is a non-event this time. Berson makes the following points:

  • First, not all yield curve inversions have been followed by a recession (although all modern recessions have been preceded by yield curve inversions). The yield curve inverted for 15 consecutive months from late-1965 to early-1967 without a subsequent downturn. (Note that the yield curve inverted again beginning in 1968, and the 1969-70 recession followed).

  • Second, long-term Treasury rates may be held down by special factors today. Among these factors are continued unprecedented foreign demand for U.S. dollar financial assets, relative supply shortages of longer-dated Treasury securities, and continued low inflation expectations.

  • Third, past yield curve inversions preceding recessions have been longer lasting, more severe, and more complete (that is, the yield curve inverted over its entire length) than the current episode.

But what does this mean to housing?

Quite a lot actually. With the White House experts jumping on the “soft landing” bandwagon [Yahoo/AP] there is rising concern that housing will determine our economic fate over the next few years. Its not just speculation anymore. A recession spells the end for housing as a powerful economic engine with higher borrowing costs and rising unemployment as the economy cools down.

However, the coverage of this latest release of information by the White House Council of Economic Advisers is confusing because it also paints a fairly rosey picture of the economy [Reuters] which means that inflation will become a threat and Bernanke will be forced to continue raising rates.

Yet GDP is expected to decline over the year – Fannie Mae has revised its projections downward. The Mortgage Bankers Association [pdf] forecast falling GDP throughout 2006. The 1.1% growth rate seen in 4Q 05 is largely felt to be an anomaly. MBA forcasts 2006 to see 4.4%, 3.5%, 3.1% and 3.0% GDP growth over each of the quarters in 2006, clearly an expectation that the economy will weaken.

This may cause the Fed to actually lower rates in 2007 to prime the pump, which may jump start housing market all over again.

Its enough to make your head spin.


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A Weakening Economy (If It Is), Has The Makings Of A Refi Boom In 2007 (If It Does)

February 8, 2006 | 12:02 am |
Source: Charles Atlas

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.


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Bernanke’s First Full Day Is Groundhog Day: Will He See Greenspan’s Shadow?

February 2, 2006 | 12:11 am |

On Wednesday, Bernanke was sworn in as the 14th Fed Chairman so his first full day is…you guessed it…Groundhog Day

According to legend, if Punxsutawney Phil sees his shadow, there will be six more weeks of winter weather. If he does not see his shadow, there will be an early spring.

translated really means

If Bernanke does not want to see Greenspan’s shadow, then he has got to keep the housing market in tact as a lynchpin to the overall health of the economy. If he is successful at implementing his inflation-targeting strategy, then he won’t see Greenspan’s shadow and the housing market would likely see a soft-landing.

Source: AP

After all, Bernanke’s got much better credentials then Punxsutawney Phil.

[Webmaster’s apology: Sorry, it was a late night post.]


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