Housing Remains the Achilles Heel of the Economy
Posted by Michael A. Kamperman on March 24, 2010
The economy tanked when home prices collapsed. All of a sudden banks, pension plans, and endowments were sitting on significant mortgage losses. Consumers were sitting on homes that were worth less than their mortgages. Everyone is still sitting and waiting for housing prices to stabilize and turn higher. It looks like we will be waiting for a long period of time. Worse, it looks like housing is poised to take another leg down. Home sales in January and February have been anemic. This despite the extension of the first time home buyers tax credit and the new trade tax credit to encourage those that sold a home to buy another one. Theoe tax credits expire on April 30, which is the date contracts must be signed to qualify. Additionally, the Fed will stop purchasing mortgages at the end of March. The Fed’s models suggest interest rates will rise by less than 1/2% when the Fed exits the market. If we have learned anything it is don’t put too much faith in mathematical models of the economy and the markets. The money simply doesn’t exist to replace the Bank of England and the Federal Reserves nearly $2 trillion in bond purchases over the last year. Interest rates are going up for someone somewhere and available credit is going to dry up for someone somewhere. My thoughts are mortgages rates could rise to well over 6% soon after the Fed exits. If we can’t sell homes with tax credits and low mortgage rates, then we won’t see the housing market turn up when we lose the tax credits and mortgage rates rise. For the record in February new home sales plunged to lowest level since they started keeping records back in the early 1960′s.These
Greece is an early precursor to what will happen when the Fed exits its quantitative easing program. Its been no secret Greece’s economy has been suffering from the global deflationary depression and that Greece had high levels of debt relative to its GDP. So why did the markets all of sudden slam Greek debt and nearly double its interest rates? It looks like the bond market is looking forward to March 31 when the Fed “normalizes” things a little more. Shrewd bond traders are not wanting to get stuck with the hot potato come April. It won’t take long for the Fed to admit it misread the strength of the economic recovery and the health of the bond markets and resume its quantitative easing program.
Now that Healthcare Reform is done, what will the Obama Administration do to aid the housing market, create and save jobs, and place the economy on firm economic ground? My fear is not much will happen. The clues come from how Healthcare Reform was handled. There was a significant emphasis placed on not increasing the deficit. And, part of the costs for increased Medicaid benefits were pushed off on the States that are known to be already broke. Plus, not much thought was given to the inability of some people to be able to afford to pay health insurance premiums. When one in seven mortgages are delinquent it is highly likely there is no available access to cash for many of those who are delinquent. Not to mention how are the 15 million people officially unemployed, and the 15 million not officially unemployed, going to be able to pay these premiums? To fix the housing market its going to take money. To create jobs its going to take money. An administration that is unwilling to ignore the deficit for its signature issue doesn’t look like an Administration that will ignore it for issues it clearly is not as interested in. Without much more help from Washington the outlook for home prices, jobs, and economic growth is not good.
