May232014

Will weakness in housing prompt more stimulus?

Weak housing numbers will not cause the federal reserve to change its policies because aggregate debt is rising and mortgage rates are still low.

In the minds of some people, unlimited support of inflated house prices is an absolute, not to be questioned or wavered from. If house prices are weak, stimulus is required. If sales are weak, stimulus is required. Since we no longer have a free market in anything, every gyration in house prices or demand is greeted with more calls for stimulus; however, this time, I believe the calls will fall on deaf ears. The federal reserve is not going to employ lower interest rates or unconventional stimulus measures to prop up flagging demand, despite pleas from loanowners, realtors, and bankers to do so.doing nothing

Why won’t the federal reserve get involved? For one, the problem is not high interest rates. When the federal reserve began tapering its purchases of mortgage-backed securities, many feared interest rates would rise sharply and pummel affordability. The opposite occurred. Since the federal reserve announced they were tapering their asset purchases, mortgage interest rates have steadily moved lower. If interest rates would have moved higher, perhaps the federal reserve would consider buying more to stabilize rates, but since mortgage rates actually went down, why would they buy more mortgages? Rates are already low.

The second reason the federal reserve won’t taper is because aggregate debt is rising again, as the steady deflation of mortgage debt over the last six years finally ended. With debt rising again, the federal reserve doesn’t need to inject money directly into the economy by printing money. I believe one of the main reasons the federal reserve decided to taper was the increase in aggregate debt because they no longer needed to counteract the disappearance of money through debt deflation.

Household Debt Inches Higher

O. Emre Ergungor and Daniel Kolliner, May 8, 2014

Household debt began to shrink in early 2009 and dropped by nearly $1.4 trillion before bottoming out in mid-2013. According to the most recent data, consumer debt has increased in back–to-back quarters for the first time since early 2008. The Federal Reserve Bank of New York reports that household debt has grown from $11.28 trillion in the third quarter of 2013 to $11.52 trillion in the fourth quarter.

In the fourth quarter of 2013, 75 percent of household debt consisted of obligations secured by real estate (mortgages and home equity loans), 6 percent of credit card debt, 7.5 percent auto loans, and 9.3 percent student loans. Mortgages were responsible for 63 percent of the increase in household debt, followed by student and auto loans. However, going forward, mortgage lending may face stronger headwinds if mortgage rates continue to rise.

debt

Households’ net worth has been increasing since the end of 2009 and has averaged 7.4 percent year-over-year growth since then. There are two reasons that household net worth can increase: liabilities can decrease or assets can increase. In the current case, household net worth is increasing because households’ financial assets are increasing faster than their liabilities. Households’ total real estate holdings increased 11.5 percent from the fourth quarter of 2012 to the fourth quarter of 2013. Meanwhile, year-over-year mortgage growth was just 0.2 percent.

Since banks aren’t handing out HELOCs with the same enthusiasm they demonstrated in 2006, home values are increasing faster than debt levels. That’s a good thing… for as long as it lasts.

According to the National Association of Realtors (NAR), the number of existing single-family home sales decreased from 4.36 million in March of last year to 4.04 million in March of this year. In a quarterly survey of senior loan officers, a net 26 percent of respondents reported that demand for prime mortgages is down (that is, the reports of decline exceed the reports of increase by 26 percentage points). A net 16 percent reported a decline in demand for nontraditional mortgages, while a net 14 percent reported a decline for subprime mortgages. As recently as the third quarter of 2013, a net 49 percent and 25 percent of loan officers had been reporting stronger demand for prime and subprime mortgages, respectively.

sales

The steep decline since last summer has everyone worried, so worried they are talking about stimulus again. I’m sure it sounds like a great idea to bankers, loanowners, realtors, and anyone else who wants to see more sales at higher prices.

How housing weakness may change the Fed’s game

Ron Insana | @rinsana, Monday, 12 May 2014 | 11:27 AM ET

It has been a winter of discontent for the economy, as a whole, but even more so for sales of new and existing homes, housing starts, mortgage applications and refinancings. Home-price appreciation has slowed in certain parts of the country, as well, but that hasn’t yet sparked a pick-up in demand.

Even with long-term Treasury rates falling to 2.6 percent, pushing mortgage rates back down toward historic lows, the flow of credit to potential home buyers has been choked off, creating a headwind in housing, and for the overall economy, from what was a tailwind a year ago.

If the spring fails to deliver any new “green shoots” to residential real estate, the Fed may do one of several things.

Why should the federal reserve do anything? At what point is enough, enough?massive_intervention

It could “taper the taper,” taking a couple months off and then re-start the taper if real estate picks up, or stop for a protracted period.

But with the cost of credit still quite low by historic standards, the Fed may have to reach into its toolbox and try some other unconventional means of reigniting the home fires in residential real estate.

So stimulating housing through interest rate stimulus isn’t enough?

It could stop paying banks the quarter point interest for deposits held at the Fed, potentially forcing banks to take that money and make loans.

Such a move would likely be opposed by banks, that are earning a tidy risk-free sum from the central bank, but the net effect could be quite forceful. It would force nearly $3 trillion of bank reserves held at the Fed into the economy.

Since banks would be earning zero, or even less than zero, on their deposits at the Fed, their incentives to lend could change quickly, particularly if the Fed were to adopt a negative deposit-rate policy — something no one is currently expecting. With that dramatic step, the Fed could actually charge a fee for holding those deposits. The Fed has written about such a maneuver in its myriad studies on how to get a deflationary economy moving again.

Let’s imagine the federal reserve does change its policies to force money back into circulation; why would those new loans go toward housing? Such a policy change may stimulate lending, but it wouldn’t necessarily stimulate real estate lending.

The Fed, FDIC and Comptroller’s Office, could also begin to relax credit standards so that qualified U.S. buyers can gain access to cheap money from banks.

Mortgage credit remains as tight and unavailable to most buyers today as it was at the depths of the credit crisis in 2009.

Relaxing credit standards? What could go wrong?

Subprime_slaves

I am not suggesting that regulators relax credit to the extent they did in the years leading up to the real-estate bubble and bust.

Yes, you are.

However, allowing bankers to make traditional 10-percent down mortgage loans to people with decent, but not perfect, credit should get the looky-loos buying again.

When did the “traditional” down payment become 10%? This guy is attempting to rewrite history with bullshit to support a weak argument.

I am betting that the Fed has a few more tricks up its sleeve to take a more targeted approach to getting the economy to fire on all cylinders.

If the federal reserve had any more tricks, wouldn’t they have used them already?

If it doesn’t “taper the taper,” I still expect the Fed will continue unconventional efforts to get the economy, and more specifically, real estate, rising again.

No, they won’t because it’s not warranted, and it’s not a good idea. If it were, the arguments presented here would be much more convincing.

The economy needs all tailwinds, and virtually no headwinds, if the Fed expects the economy to return to its fullest potential and allow it, ultimately, to restore policy to normal — whatever normal means in a post-crisis environment.

blah, blah, blah.

bum_bernanke

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