NYT: Fed Debates Pricking the U.S. Housing 'Bubble'

[DeepModem Mom]

Fed Debates Pricking the U.S. Housing 'Bubble'
By EDMUND L. ANDREWS
Published: May 31, 2005


WASHINGTON, May 30 - If the housing market has become a bubble, as increasing numbers of economists warn, would the Federal Reserve try to deflate it?

The idea runs counter to a deep-seated view at the central bank, which refused to puncture the stock market bubble of the 1990's and continues to view its main job as preventing inflation rather than influencing the prices of stocks, bonds or real estate....

***

But many economists say the housing market poses a different challenge from the stock market. For one thing, they say, the Federal Reserve's policies have played a much more direct role in the housing boom than they did in the technology-fueled stock bubble.

"This time around, the Fed's policies have played a part," said Nigel Gault, a senior economist at Global Insight, an economic forecasting firm in Lexington, Mass. "Its policy has been to boost the housing market and the consumer through very low interest rates."

Others worry that the Federal Reserve has tacitly encouraged risky speculation through its role as a chief regulator of the banking industry, which has steadily relaxed lending standards and allowed home buyers to borrow more money through higher-risk loans....


http://www.nytimes.com/2005/05/31/business/31housing.html?oref=login

[mumon]

1. Irony alert...

If the housing market has become a bubble, as increasing numbers of economists warn, would the Federal Reserve try to deflate it?

The idea runs counter to a deep-seated view at the central bank, which refused to puncture the stock market bubble of the 1990's and continues to view its main job as preventing inflation rather than influencing the prices of stocks, bonds or real estate.

So inflation in the housing, bond and stock markets is good inflation?

[bemildred]

2. Babble. The Fed created the bubble, intentionally. nt

[tobeornottobe]

9. Why

did they do that?

[bemildred]

10. Politics, why else? nt

[tobeornottobe]

17. Could you elaborate?

The Fed created the housing bubble for what purpose and for whose benefit?

Thanks.

on edit: I just read post # 13, is that what you are also referring to?

[bemildred]

18. Yep. nt

[boredofeducation]

13. To prop up the economy

They needed something to prop up the economy and the only thing that was thriving was Construction. With lower interest rates more and more people are buying homes. Demand went up and so did new construction.

[boredofeducation]

3. Raise Interest Rates

That would deflate the bubble real fast, a 300K mortgage might be affordable to most at 5.5-6%, but at 11%+ the payments are a killer. Cheap money created the problem and over specuation by investors. Take a look at the rent section of the newspaper, use to be one column where I live, now it has it's own page. That is bad, very very bad. I seen one ad for a 2 bedroom townhouse for 1200 a month or 300K purchase, renting is a lot cheaper when you plug in the numbers.

[wicket]

4. I currently rent

I just can't afford a house right now- and plan to buy once the bubble bursts.

[boredofeducation]

8. Save your pennies

Save your pennies. That is the advice I have been giving out to my friends who will be first time homebuyers in a few years. Once rates go up, banks will be less likely to loan out money like they do now, and hopefully they will cut out the Zero Percent down non-sense. If you save enough cash, you might be able to buy a pre-forclosure or have nice down payment on something nice.

If your area has not appreciated rappidly over the past few years, this is the time to buy, because the rates are low. Some areas the market is still flat or had very little upside, these are bargains because the interest rates are still low. Areas like NY/NJ/CA/Las Vegas are crazy right now. Junk that use to sell for 40K is now selling for 120K-200K, homes that sold for 80K are now selling for 200K-250K. Did the schools get better in those areas? NO. A big influx of high paying jobs? NO. These areas are mostly blue-collar, or commuters making a 2hour commute to and from NYC. A decline will be in order, expecially in areas that appreciated 2X to 3X in the past three years.

A national housing bubble, probably not, a bunch of local ones, a big YES.

[phantom power]

6. That's the rub. They don't want to crash the market.

They painted themselves into a corner. They dropped interest rates to insane lows, to compensate for the popping of the tech-bubble in 2000. It worked, but now they've got an even bigger bubble on their hands, and if the housing industry collapses, there's nothing to compensate. It will almost certainly result in a full-blown recession.

It may still be the least-bad option. Waiting will only make it worse when it happens.

[LibDemAlways]

5. "Preventing inflation?"

The low interest rates have resulted in the most extreme inflation imaginable in the cost of housing. In my 35 year old neighborhood of tract houses in a So. Cal suburb, old, beat up pieces of shit are now on the market for over $700K.

The fed's policies are directly responsible for this insanity which keeps first time buyers out and ultimately prevents people from moving up because even if they qualify for an interest-only loan, they can't afford the property taxes on the new place.

If the fed does decide to prick the bubble, recent homebuyers around here will be renaming the neighborhood foreclosure city.

[boredofeducation]

11. You recent homebuyers are mostly Investors, or "bag holders"

Your recent homebuyers are mostly investors, or what we will be calling "bag holders". I believe some are over leveraging themselves to much, and once the bubble pops, their will be a ton of forclosures flooding the market. If you have cash and want to invest into real estate, wait a few years, you will be very happy. If you have real estate and wondering when to unload, SELL NOW! Cause this roller coaster can only go so high before the fall.

I have seen investers buy up fixer-uppers at only 10K below market, when they should be buying them at 40K below market. They are assuming the prices will continue to rise. They are going to put 20K into them and hope to sell it for 60K more than what they paid. Might have been able to get away with that insanity a year ago but now I believe buyers are wising up right now. The only homes that sell fast now are the ones below market. Everything else is sitting.

[LibDemAlways]

15. True. Lots of dumps being bought by

investors who are paying too much, making cosmetic changes, and putting them back on the market in the hopes of reaping a big profit. Around here, they're greedy. Buying for $650, making fifty grand in improvements, and then trying to sell for $800. A couple of these places right near me are sitting unsold. There are limits to what people will pay. I also know people who've sold and are renting, hoping that prices will plummet.It will be interesting to see where the market is a year from now.

[boredofeducation]

16. Rent vs own

I have seen some Investors do a great job on rehabbing, and some that do crap. Right now in some areas it is cheaper to rent than to own right now. If a 300K property only rents for 1200 a month, that property is greatly over priced. That place at 6 Percent for 30 years would be 1798 a month not including taxes, insurance, and upkeep. I did not inlude utilities because most of the time utilities are not included in SFH (single family home) rentals. But your land lord pays the Taxes, insurance and repairs. So right now renting is a bargain.

[phantom power]

7. There needs to be (gasp!) regulations on the credit/mortage industry

regarding how much credit a person/family can obtain, and probably also what kind of loans/mortages companies are allowed to sell. For instance, these "interest-only" loans are just a disaster waiting to happen, and there's no reason we shouldn't simply outlaw them. There also ought to be much stronger limits on how much credit a person can get, based on their income.

Credit is like driving. It's not a right, it's a privilege, regardless of what people prefer to think.

http://www.washingtonpost.com/wp-dyn/content/article/2005/05/27/AR2005052701345.html

[n2doc]

12. no frickin' way this is going to happen now

If we pop the bubble by raising rates, we go into a recession just as the 06 midterm elections begin in earnest and even Dibold might have a hard time re-electing the Pukes. We will totter along until the whole thing collapses on its own, or until Dems are in Power. Then you will see rates go through the roof.

If anything long term rates are going down in the short term, they have been these last few months. Hangover is going to be a bitch, though.

[boredofeducation]

14. The feds are going to have to make a choice: Recession or Depression?

The feds are going to have to make a choice: Recession or Depression? You can only keep this going for so long, the longer the harder the fall.