Bernanke pledged to do what he can to reflate the housing bubble

The monthly housing market reports I publish each month became bullish late last year due to the relative undervaluation of properties at the time. I was still cautious due to weak demand, excessive shadow inventory, the uncertainty of the duration of the interest rate stimulus, and an overall skepticism of the lending cartel’s ability to manage their liquidations. In 2012, the lending cartel managed to completely shut off the flow of foreclosures on the market, and with ever-declining interest rates, a small uptick in demand coupled with a dramatic reduction in supply caused the housing market to bottom.

Even with the bottom in the rear-view mirror, I remained skeptical of the so-called housing recovery because the market headwinds remained, and the low-interest rate stimulus could change at any moment. Without the stimulus, the housing market would again turn down. It wasn’t until Ben Bernanke, chairman of the federal reserve, took out his housing bazooka and fired it in September that I became convinced the bottom was really in for housing. Back in September, Bernanke pledged to buy $40 billion in mortgage-backed securities each month for as long as it takes for housing to fully recover. With an unlimited pledge to provide stimulus, any concerns about a decline in prices was washed away.

To remove any lingering doubts about Bernanke’s intentions, he has given subsequent speeches where he reiterated his conviction to reflate the housing bubble.

Bernanke Says Fed Will Do What It Can to Support Housing

By Joshua Zumbrun – Nov 15, 2012 12:06 PM PT

Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market facing obstacles ranging from too- tight lending rules to racial discrimination.

“We will continue to use the policy tools that we have to help support economic recovery,” Bernanke said today in a speech in Atlanta, Georgia.

Bernanke is pressing on with record easing including a plan to buy $40 billion a month of mortgage-backed securities, aiming to spur growth and reduce a 7.9 percent unemployment rate. He has resorted to unorthodox policies six years after home prices started a plunge that knocked the economy into the longest recession since the Great Depression.

Unorthidox is one description. Unprecedented is another. Prior to the Great Recession, the federal reserve had never purchased anything other than short-term treasuries. The recent purchases of mortgage-backed securities breaks with nearly 100 years of precedent and tradition.

Bernanke said while tighter credit standards after a collapse in the subprime mortgage market were appropriate, “it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”

Nonsense. Some creditworthy families will always be denied mortgages. In parsing the shades of gray, some people who would have repaid their loans are always excluded because they share too many characteristics with Ponzis and flakes who will not repay.

Some members of the Federal Open Market Committee said monthly mortgage bond purchases by the Fed are “likely to reinforce the nascent recovery in the housing market,” according to minutes of their Oct. 23-24 meeting released yesterday. FOMC members “generally agreed” that a housing recovery is at last under way.

We’ve heard this before. Let’s see if they are right this time.

Bernanke endorsed that view in today’s remarks at the Operation Hope Global Financial Dignity Summit, saying an industry that was holding the economy back has turned a corner.

Housing Weakness

“Continued weakness in housing — reflected in falling prices, low rates of new construction, and historic levels of foreclosure — has proved a powerful headwind to recovery,” Bernanke said. “It is encouraging, therefore, that we are seeing signs of improvement in the housing market in most parts of the country.”

Bernanke said housing-finance authorities have taken steps to “remove barriers to the flow of mortgage credit” and referred to efforts by the Federal Housing Finance Agency and by Fannie Mae and Freddie Mac to clarify rules surrounding mortgages that go into default.

These steps, the 58-year-old Fed chief said, should “increase the willingness of lenders to make new loans.”

Bernanke is either a liar or an idiot. Lenders are unwilling to make loans to people who might default and cause them to lose money. That’s the way it should be. Credit quality is the only reason more lending is not taking place. And since lenders just created an entire generation of Ponzis with their lending during the housing bubble, they should be cautious about loaning to these people again. As a taxpayer, I only wish the FHA were more cautious (please see The FHA is giving loans to Ponzis to reenter the housing market). The losses the FHA is taking right now is largely due to loaning money to people with marginal credit. Given the losses they are taking, private lending is wise to hold their standards high.

Economic Recovery

While regulatory policy “will be important for restoring a fully functioning housing and mortgage market, the strength of the overall economic recovery is crucial as well,” Bernanke said. …

A number of FOMC officials believe the central bank may need to expand its monthly purchases of bonds next year after the expiration of a program to extend the maturities of assets on its balance sheet known as Operation Twist, according to the minutes released yesterday.

Rather than slowing down, the federal reserve is talking about cranking up the printing press even more.

The Fed’s actions have helped push mortgage rates to historic lows. The average fixed rate on a 30-year mortgage fell to 3.34 percent today, according to a Freddie Mac index, the lowest on record.

Those rates have increased affordability and helped bolster home price. The S&P/Case-Shiller index of property values in 20 cities rose 2 percent in the year beginning in August 2011, the biggest annual gain since July 2010.

Supporting Gains

Increasing home prices are rippling through the economy, supporting gains in consumer confidence and spending ..

“Homebuilder sentiment has improved considerably over the past year, and real estate agents report a substantial rise in homebuyer traffic,” Bernanke said. …

Americans bought new homes in September at the fastest pace in two years, the Commerce Department reported last month, with demand up 27.1 percent from a year earlier.

The year-over-year gains on new home sales will be very impressive over the next several years. These numbers will be touted in the financial press as a big deal. However, keep these numbers in context. Homebuilding is still very weak by historical norms.

Bernanke will continue to stimulate housing for the benefit of the member banks of the federal reserve until he is either removed from his post, or house prices reflate back to peak levels so lenders can finally foreclose on the squatters without losing money. I expect to see interest rates continue to fall, and house prices continue to go up. Bernanke will reflate the housing bubble, along with its commensurate problems, to solve the problems created by the last housing bubble. The last vestiges of a free market are quickly fading from memory. We are embarking on a new era of government-controlled housing.

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