Nice market rally on the news... but where will they stop - 4.75%? 5.00%?
And when they stop, will mortgage rates (and the 10 year T-bill) actually rise, as inflation fears take over?
And what do you think the Fed is targeting more - the housing bubble, or inflation?
Oh, Ben, it's gonna be a fun ride. Your boy Greenie has left you quite the conundrum.
Here's the housing quotes from their minutes today:
Although some scattered signs of cooling of the housing sector had emerged, the pace of construction activity and sales remained brisk
Activity in the housing market remained brisk despite a rise in mortgage interest rates. Starts of new single-family homes dropped back somewhat in October from September's very strong pace, but permit issuance remained elevated. New home sales reached a new high in October, and existing home sales eased off only a little from the high levels recorded during the summer.
Other available indicators of housing activity were on the soft side: An index of mortgage applications for purchases of homes declined in November, and builders' ratings of new home sales had fallen off in recent months. In addition, survey measures of homebuying attitudes had declined to levels last observed in the early 1990s.
January 03, 2006
Question for HP readers: The Fed's interest rate moves appear to be winding down - what happens to housing when they stop?
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Good CNN Fed article just came in - I'll post here
http://www.cnn.com/money/2006/01/03/news/economy/fed_bernanke_challenges/?cnn=yes
Bernanke may have to grow up fast
Stock market crash greeted Greenspan. Will housing, hedge fund, debt crisis test next Fed chief?
Pop goes the housing bubble?
There is little disagreement among economists, builders and real estate execs that the white hot housing market is going to slow in 2006.
The question is whether it is a gradual slowdown or a more drastic, broad-based decline that sends home prices tumbling, rather than stabilizing or dipping gradually.
If it's the former, there's probably little for Bernanke to worry about. But if the so-called housing bubble does pop, it has potential to hit not just home sellers and builders but also the nation's financial markets and the broader economy.
"I would attach a reasonably high probability that there will be a problem in the housing or finance markets that will test the next Fed chairman," said Zandi.
I cannot believe the Fed has put the American people into this circumstance.
If they stop raising rates anytime soon, it’ll likely mean the dollar will get crushed.
When this is all over, the congress needs to place new limits on the Fed. And the charter needs to be refined … the Feds job is price stability, NOT micro managing the economy!
The housing market was going to collapse under it's own weight sometime - this time was moved forward by the rate increases. Don't be under an illusion that the fed has popped the bubble; the legs of the r.e. market aren't strong enough to keep running much longer.
I think another .25% and they are done. I'd like to see the rate at 5% as a good measure but since housing is already coming down, they will stop at 4.5%.
I agree with Tom. Too much money on the sidelines for price instability. It will take a while to flush out all the investors waiting with piles of cash!
LONG SLOW DEATH
Keith you just don't get it. Neither does 99% of Americans and 99.99% of the world
The Feds don't control the free market rates. The federal reserve has a program where banks can borrow money for a day at the intra=day federal discount rate. As long as free market rates are higher than this rate, the Fed has the power to slow the economy down, or as they did during the credit crunch, susdise banking by allowing banks to borrow from the Federal Government on a daily basis only to loan money back to the Fed in the form of T Bill purchases for a higher amount.
Not today though. Wiht the market place offering cheaper money. The banks have no use for the Fed's prgram.
The Fed is powerless against inflation.
What choice do they have but to back out of interest rate hikes? Nobody is borrowing from the intra day discount rate as it is.
To Dogcrap Green...
Where are they borrowing from?
mister anonymous,
Do you realise that Bank of America has a PE of under 12 and is paying a dividend of over 4%!!!!
Who do you think they need to borrow money from?
The dollar has been surging against the Euro and theYen for an entire year!!!!
Who do you think they need to borrow money from?
The banks were borrowing every day against the Feds and loaning it back to you in home equity loans at two to three time the rate they were borrowing against back in 2001 to 2004. Now they have the cash rolling in still from these loans.
Who do you think they need to borrow from?
The banks have double the mimumem payment on credit cards!!!!
Who do you think they need to borrow money from?
The facts are the banks are now in the driver seat. To even think they would borrow money for more than they can now loan it out for is obsurb.
I understand why you post under anonymous. Last time I beat the crap out of you. Now go back to Australia where people think you are of average IQ.
No cash rich bank will be borrowing from the Feds to cover their cash outflows. THERE IS NO OUTFLOW!!!!
Short term rates are way TOOOO HIGH!!!
More stuff for y'all to copy and paste your comments from:
http://www.google.com/search?q=cache:gPRtxHrmQfsJ:www.cepr.net/publications/housing_fact_2005_07.pdf
dogcrap -
you, my friend, don't get it
every ARM home-owner out there gets their mortgage uppped .25 every time the fed upps .25.
this bubble was caused by the fed lowering rates too low. this "what's my payment" bubble was not a "what's the asset cost" bubble.
and the fed erred on the way down (causing the way up). I feel they're now erring on the way up (not going high enough)
but, alas, time will tell who gets it and who doesn't.
I hope you're still posting a year from now.
hey, nobody commented on this hilarious picture of greenie yet!
My favorite is Grandpa Greenspan blowing BUBBLES!
The big factor overlooked is the borrowing cost for Bush's IRAQ war. Greenspan kept the interest cost low for Bush. Unintended consequence A HOUSING BUBBLE! Which was denied until recently by Greenspan and is denied by Ben B.
The other factor is the blind govenmental march toward free trade which is killing the manufacturing regions of this country from the Rust Belt to North Carolina. It is causing in these areas a deflationary downward spiral of wages. These places NEED economic stimulus in order to develop replacement industries.
The other areas did NOT need the money because they were hot economically.... strong defense industries, trade bucks coming in, or hot retirement areas. The success of these areas attracts new residents. For example who in their right mind would consider moving to Flint, Michigan, they would rather move to Orlando etc. The demographic shift in recent years has been dramatic!
Also, remember that foreigners hold much of our debt such as the debt that is generated by the MASSIVE trade deficit. China is one of those holders. Imagine if they decide they want Taiwan and we say NO and they then dump the debt they hold.... UP GO THE INTEREST RATES FED OR NOT! Any way, housing gets crapped!
Don't you enjoy the instablity of these times!!!!!
the dollar demise started today
1) must go lower to get trade imbalance back to reality
2) must go lower to lower value of our out of control debt
3) must go lower as premium for increasing US interest rates is now mute
I like canadian dollars
Seriously, why all the whining about Greenspan. Here's what he's done:
- Core inflation has fallen below 2% from over 9% in the 1970s and 3.7% when Greenspan took over in 1987.
- GDP has climbed an average 3.1%.
- The U.S. enjoyed its longest postwar expansion, from 1991 to 2001. Greenspan's two recessions — 1990-91 and 2001 — were brief and mild.
- Unemployment never hit the 8%-10% levels common during the 1970s and early 1980s.
In fact, the labor market reached what's traditionally considered full employment — 5% or lower — for five of the last nine years.
- Job growth and low inflation created a wealth boom. Even with the early-'90s housing market freeze and the 2000-02 bear market, Americans on average are three times wealthier than they were in 1987.
Big banks do borrow from the Fed, or anybody else at the "fed funds rate" (see Wikipedia).
Why? Why does a dog lick his balls? Because he can.
It's almost the cheapest source of money (except for zero interest rate checking accounts with huge garbage fees), which they then loan out at much higher rates, and make buttloads on the spread.
It's a very very good business, which is why banks are rich.
If you could borrow from the Fed or at Fed funds rate you would. But you can't, because you're not a rich bank.
The reason that BofA has a 12 PE and a 4% dividend yield is precisely because they can do what few others do: get a buttload of cheap money and lend it out expensively.
Great post and great replys. Thanks to anonymous for the Google link. It really says it all. I saved it in the PFD format for future "Fortune Telling"
"1. The U.S. enjoyed its longest postwar expansion, from 1991 to 2001. Greenspan's two recessions — 1990-91 and 2001 — were brief and mild.
2. Unemployment never hit the 8%-10% levels common during the 1970s and early 1980s.
3. In fact, the labor market reached what's traditionally considered full employment — 5% or lower — for five of the last nine years."
I'll dissect each point.
1. True then false. Longest expansion post war. BUT 1991 recession was short but jobless recovery for 2.5 years, finally picking up in 1995 then 2001 recession was shallow and long, with jobless recovery for 3 years (2004). THREE YEARS!! That alone qualifies it as the worst recession since the Great depression. To characterize the Greenspan recessions as mild is inaccurate.
2. Depends on who you ask. Real unemployement during the last recession was close to 10% although the "official" numbers were ~ 7%.
3. That's true, but a disproprotionate amount of jobs are being created at the bottom of the wage scale (service/retail). Full employement means little if everyone is making minimum wage in a world that needs $12/hr to survive.
Dr. Chaos, indeed Dogcrap guy was correct in his assertion that banks do borrow from each other at the Federal Funds Rate. The Fed does have the a borrowing option available at the Federal Discount Rate. Sometime during the early 1990s the Fed Funds rate became the one that counted.
Dogcrap though is way off in his assertion that because of this, the Fed is powerless against inflation. After all, it is the Fed that has a large part in creating inflation or deflation as the case may be.
It attempts to fight inflation through control of the money supply. This is indirectly indicated through the Fed Funds rate. The long-term growth in the money supply is biggest driver of inflation.
Incidentally, it is the Fed's current contractionary monetary policy that will facilitate a correction. Again, like in 2000, I believe the Fed is overshooting as outside of certain sectors there is little inflationary pressure.
To go on, lets also address employment.
I don't believe for an instant that the 2001-2002 recession and subsequent "jobless" recovery was the worst since the Great Depression as asserted by moman. A.) GDP continued to grow along with household spending.
B.) You are looking at one survey, the establishment survey. Take a look at the household survey. You will see a great divergence in the periods after 2002. No one really knows why, but its there.
Also, unemployment never reached 7%, highest was 6.3% in June of 2003.
Where does your 10% number come from perchance?
Also, how do you know what "quality" of jobs are being created? Do you have any statistics or just impressions???
" A.) GDP continued to grow along with household spending.
B.) You are looking at one survey, the establishment survey. Take a look at the household survey. You will see a great divergence in the periods after 2002. No one really knows why, but its there.
Also, unemployment never reached 7%, highest was 6.3% in June of 2003.
Where does your 10% number come from perchance?
Also, how do you know what "quality" of jobs are being created? Do you have any statistics or just impressions???"
a) GDP did grow from 4Q 2001. Just because we have positive GDP doesn't mean the economy is great. GDP was also positive from 1933-1937 yet that was still at the tail end of the great depression, which wasn't really over until 1941.
b) Unemployement only counts those who qualify themselves as actively looking for work but cannot find work. It does not account for those who have given up after looking for X weeks. (aveage of 16 weeks in 2002) By many estimates, there were as many as 2-5 million people that stopped looking for jobs during that time, pushing true unemployment to ~ 10%.
c) Quality of jobs: I'll have to qualify it as observations, but in the area I live in it's actual fact. There have been ~4 million jobs created since 2003, I was reading somewhere that 1.5 million of them were in the real estate & construction business. Those aren't stable jobs and many should evaporate in the next couple years.
When I get some time today I'll research articles to backup my points.
mortgage rates dropped again!!!!
Moman,
You are 100% correct on unemployment. It does not measure discouraged job seekers (ie. those who drop out of the job market). This creates the paradox of increasing jobs and increasing unemployment. I think its happened a few times in this current cycle.
There is another survey called the Labor Force Participation rate. That gives an indication of the total number of workers in the economy.
Also, take into consideration the incentives that an individual faces. In a boom-time economy (like 1998-2000) the marginal benefit for working exceeds benefit received from not working. For example, a housewife may voluntarily leave the workforce because she can't get a good enough job, but may rejoin at a point in the future.
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