The Fed and the Housing Market

Some Fed members and Fed Chair Janet Yellen see weakness in the housing market but not the overall economy.

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The Fed is Conflicted on the Direction of the Housing Market- But Not On The Rest of The Economy

Housing Goes from a Supposed Driver of the Economy to a Drag

After a five year $4 trillion printing spree, the current round of quantitative easing (QE) appears to be on a set course to conclude by the end of this year.

QE was initiated in 2009 with the promise from then Fed Chairman Ben Bernanke that “money printing is needed because the economy is weak and inflation very low, and that when the economy begins to recovery that will be the time when we can unwind QE and raise interest rates”. Since 2009 we’ve seen the Fed start and stop QE programs. The justification for stopping this round, however, is slightly comical. This time Fed Chair Janet Yellen and the Fed Presidents insist QE can be stopped because the economy has improved and is in the “recovery” that Chairman Bernanke envisioned five years ago- with the caveat that the Fed will keep interest rates low for a “period of time” after QE ends.

The Fed has made no public admission that QE has not worked to improve the job market or to increase productivity (1st quarter 2014 GDP +.01%), or that it has gone on for too long, or that it has been nothing more than a policy of bailonomics or an ongoing bailout for the too big to fail banks, or that continuing QE might cause U.S. creditors to loose confidence in the dollar or that it has been a gift for only the wealthy to enjoy (despite protests from Ms. Yellen to the contrary) by generating higher luxury home and stock prices.

Despite any of the foregoing, the reason the Fed is giving for ending QE via “tapering” is the economy is improving and can stand on its own without QE. Despite a lower labor participation rate, stagnant wage growth, a slowing real estate market that never generated many sales during its “recovery”, the Fed is sticking to their annual narrative that growth will accelerate in the second half of the year. The first quarter’s poor performance was blamed on bad weather. Not withstanding April’s lack luster performance and the absence of any meteorological basis for its weakness, the Fed remains unanimously upbeat about the economy.

The Fed, however, is split on the health of the real estate market.

Here is what some Fed Presidents and Fed Chair Janet Yellen are saying about the real estate market and the economy:

Philadelphia Federal Reserve President, Charles Plosser (hawk)

Housing fundamentals are sound!

Against a back drop of declining home sales, declining mortgage applications, a declining home ownership rate but rising home prices, Fed President Charles Plosser still loves the housing “recovery”.

Federal Reserve President Charles Plosser blamed the weather for poor economic performance in the first quarter: the “stiff winter weather with snowstorms and frigid temps affected every aspect of the economy” but the economy is on “firmer footing” providing “cause for optimism.” Plosser believes “the fundamentals of the housing market remain sound, including stronger household formation, solid job growth, and consumers with stronger balance sheets.”

“Just because housing starts are slower or sales are slower, that doesn’t mean the housing market is weak, because that’s not consistent with a continued increase in prices,” Plosser said. “I’m not panicky about the housing market.”

But housing market is telling us otherwise. Indeed, BlackRock CEO Laurence Fink said recently that the housing market is “ structurally more unsound ” than prior to the financial crisis due to its reliance on Fannie Mae and Freddie Mac.

Mr. Plosser sees as an improving economy and therefore thinks the tapering of QE should be faster and the end of it come quickly. Plosser has been a vocal critic of QE and is perhaps donning the rose colored glasses with which to view the economy and housing market to convince his fellow Fed members to end QE.

Mr. Plosser is a voting member of the Fed board this year.

New York Federal Reserve President, James Dudley (dove)

The housing market is not so hot, but the overall economy is fine and set for growth.

New York Fed Bank President Charles Dudley is less optimistic about the housing market and noted recently that there has been a “deep and protracted” housing downturn.

Dudley cited student loans as impacting first time home buyers, which in turn impacts trade up buyers who need first time home buyers to buy their homes before they can sell. Dudley also joined in the chorus blaming the unusually harsh weather for the housing slowdown.

Dudley also noted that access to credit is slowing the housing recovery. Dudley must welcome the recent announcement that Freddie Mac and Fannie Mae are set to lower credit standards in order to boost the housing market.

While somewhat pessimistic about the housing market’s prospects, Mr. Dudley remains positive about the overall economy: “I expect the economy to get back on to a roughly 3 percent growth trajectory over the remainder of this year, with some further strengthening likely in 2015” Dudley said recently in a speech to New York Association for Business Economics.

Mr. Dudley is a voting member of the Fed board this year.

San Francisco Fed President John William (dove)

Surprised at recent weakness in the housing market, but the rest of the economy is fine.

San Francisco Fed President John Williams said in a speech in San Francisco recently while the economy is clearly recovery he was surprised at the weakness in the housing market.

Mr. Williams said he expected housing to offer a “a much stronger tailwind” for the overall economy. “While home construction and sales showed substantial momentum in 2012 and the first half of 2013, the wind has been taken out of the sails since then.” Mr. Williams said.

The rest of the economy is fine according to Mr. Williams blaming first quarter weakness in the economy on the weather. Mr. William also expects the U.S. economy to grow 3% this year and next and the unemployment rate to fall from 6.3% today to 5.25% to 5.5% by the end of 2016.

Mr. Williams is an alternative voting member of the Fed board this year.

Chair of the Federal Reserve Janet Yellen

The housing market is flattening, but the economy is on track for solid growth

Janet Yellen recently told Congress that flattening housing activity “could prove more protracted than currently expected.” and cited “fresh risk in the housing market.” “Readings on housing activity — a sector that has been recovering since 2011 — have remained disappointing so far this year and will bear watching.”

As to the slow down in the over all economy, Ms. Yellen mused: maybe it’s just the weather. “I see the pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather,” she said. “With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter,” Ms. Yellen said.

Time to Toss Housing Under the Bus?

The Fed speaks of housing as having its own particular set of issues separate from the economy, which is true, but the weak underlying economy is probably the biggest drag on the housing market.

Over the past five years the Fed has printed $4 trillion to buy near worthless mortgage backed securities from otherwise bankrupt banks and to fund 90% of the U.S. government’s deficit spending with the stated purpose of boosting real estate and stock prices. The Fed now appears to be realizing that rising home prices are making housing unaffordable, resulting in lower sales and not helping the overall economy*. It seems the Fed is willing to start making excuses for QE’s failure to ignite a broad based real estate market recovery but is still clinging to the belief that QE has done the trick for the rest of the economy.