Housing Suffering Relapse Confronts Bernanke Credit Conundrum
By Kathleen M. Howley and Rich Miller
Sept. 21 (Bloomberg) -- The recovering housing market may be heading for a relapse as President Barack Obama and Federal Reserve Chairman Ben S. Bernanke consider ending support for the source of the global financial crisis.
The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.
“Things could get ugly,” said Lawler, an independent consultant in Leesburg, Virginia, who spent 22 years at Fannie Mae, a Washington, D.C.-based government-controlled mortgage- finance company. “We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”
A trio of Fed presidents -- Jeffrey Lacker of Richmond, James Bullard of St. Louis and Dennis Lockhart of Atlanta -- has publicly raised the possibility the central bank might not spend all the money authorized for the mortgage-backed securities. Lacker questioned whether the economy needs the additional stimulus in an Aug. 27 speech.
An abrupt stop might push up mortgage rates by a half to one percentage point, said Hooper, a former Fed official. Tapering off -- by reducing weekly purchases and stretching them beyond the end of the year -- would have a more muted effect, pushing rates up by at least a quarter percentage point, he said, adding that the Fed may announce just such a strategy after its meeting this week.
Lawrence Yun, chief economist of the realtors’ group, estimates that about 350,000 home sales through August were directly attributable to the tax credit of up to $8,000 for first-time buyers.
Treasury Secretary Timothy Geithner, 48, called signs of stabilization in the U.S. housing market “very encouraging” and told reporters on Sept. 17 that the Obama administration will take a “careful look” at extending the credit.
Comments: The housing crisis is far from over despite the happy talk in the media and by politicians. If interest rates increase as little as one percent, the reset payments for many borrowers with mortgage terms coming due in the next 12 to 18 months with be unserviceable.
This is why the current administration is desperate to keep interest rates low, to the point of buying their own treasuries. The unintended consequence of this plan is that, at some point, America's largest creditors will not be satisfied with poor rates of return and higher risks on treasuries. When this point will be reached is unknown. What is known, is that China is rapidly buying up all the tangible assets it can get its hands on.
As an example, this morning, China announced its intention to buy part (or all?) of the IMF's sale of 403 tonnes of gold.
This move could put China's gold holdings up to about 1450 tonnes. When one considers that they only had 400 tonnes in 2003 and are encouraging its citizens to buy gold and silver, it certainly is food for thought.
Why would China want to more than triple its gold holdings in 6 years?
Have the Chinese already priced in a likely default by the US on sovereign debt?
How are these things related to the American housing situation?
In my view, China is strategically moving its US dollar assets to tangible ones slowly as it assumes the probability of US default is increasing quickly.
Naturally, a default would mean much higher interest rates, which would, in turn, cause a deflationary spiral in housing prices until credit dries up completely as many more financial institutions go bankrupt.
Finally, when credit dries up and only cash buyers remain, the deflationary forces abate and a rebuilding and recovery process begins.