Home Prices ‘May Not Be Justified’: Ferguson
A Fed official was speaking today. “‘The outlook for real activity faces a number of significant risks, including the possibility that house prices and construction could retrench sharply and that energy prices could rise significantly further,’ Federal Reserve Vice Chairman Roger Ferguson said on Friday.”
“‘The incoming data suggest that the housing market has begun to cool somewhat, but they do not point to a sharper falloff,’ Ferguson said. ‘Of course, house prices may become an area of vulnerability,” by reducing the growth of household wealth, leading consumers to cut back on spending.’”
“‘House prices have increased at a remarkable rate during the past several years, and for some fundamentally sound reasons, including low mortgage rates. However, the possibility remains that the recent run-up in prices may be greater than can be justified by the fundamentals and that increases in house prices may moderate or undergo a sharper adjustment. The latest data on house prices, including the figures released this week, provide a hint that a moderation in house prices, and nothing more serious, may now be under way.’”
“‘Another possible avenue for gauging the effects of housing prices on the economy is to look at experiences in other countries..Australia has experienced a decline in real house prices over the past year. One difficulty in interpreting the foreign evidence is that gauging the direction of causality is difficult, that is, are adjustments in house prices causing a slowdown in real economic growth or is a slowdown in activity causing the adjustment in house prices.’”
“On this point, a recent Federal Reserve study of international experience documented the pro-cyclicality of real house prices: House prices have tended to reach a maximum near business cycle peaks, with real GDP growth slowing during the first year or so after house prices peak.’”
“‘Given the limits of what we know about the future path of housing prices and about the implications of any particular house-price scenario for real activity, the Federal Reserve will have to continue monitoring this area closely.’”
Some related links:
‘Bond investors worldwide have been spooked this year by prospects for credit-tightening moves by the each of the ‘Big Three’ central banks — the Federal Reserve, the European Central Bank and the Bank of Japan. ‘Generally, people realize we’re in a rising rate environment,’ said Frank Hsu, a bond strategist at brokerage Fimat USA in New York.’
‘low interest rates and a strong housing market have kept US consumer incomes from being squeezed and thus allowed US spending, a key source of global demand, to be buoyant. But there is an alternative explanation. It is that asset prices have been pushed higher by the lax monetary policies of central banks.’
rising rate environment?
not in Europe. The first time (some months ago) when the ECB raised their creditrate by 0.25%, the Dutch banks lowered mortgage rates and interest rates for savings accounts by 0.5%. Wouldn’t be surprised if they do this again after the recent 0.25% rate increase (+0.25% WOW - with their current inflation fighting regime, the ECB will need about 5 years before their credit rate equals real inflation …).
credit tightening is a joke here, it’s just a way for guys like Trichet to cover their a** in case we get to repeat the Weimar episode of the previous century.
Thanks for the tip — note to self: avoid Euro-denominated investments…
yes, they are both toilet paper but the euro is definitely the worst quality.
increases in house prices may moderate or undergo a sharper adjustment.
What kind of statement is that? The sky may be blue, but it may also be red.
Forecasts which are broad enough to cover all contingencies are 100% certain to prove correct.
Hey GetStucco,
You’re being so “formal” today… you usually say this is a “cover your ass” - CYA manuever. (see, I do read your posts
)
Same diff…
I really don’t know what’s going on. I’m just a Fed official that works here.
Continuing on with the Fed officals ramblings…”Did I mention over 78% of TOTAL loans outstanding on our member banks balance sheets are linked to or are real estate related loans? ” PS - i guess we couldn’t help ourselves, serving the public interests!”
This 78% represents the highest Pecentage ever tracked in over 60 years.
The Fed from a PR standpoint is in an interesting position. One could say they’re aggressive action post tech boom, post 9/11 saved the country from disaster. We’ll never know for sure. I would weigh in on the other end and say they have messed up the US economy, wrongly stimulated less productive sectors, encouraged less than optimum behaviors and in doing so have now lost all credibility.
What “may not be justified” is this guys use of the word “possibility” when the right term is “almost certainly”.
Fannie Mae’s stock price might not be justified, either. But it is remarkably bouyant off a protective floor around a price of $54/share after a spectacular rise without fundamental justification right at the beginning of 2006, especially for a company which, according to the usual rules, should have been delisted for failure to post financials.
http://tinyurl.com/rm45m
Hey GS,
The delisting rules will apply for Fannie Mae when it trades
The delisting rules will apply for Fannie Mae when it trades below $1 for a month. That one’s a little harder to sweep under the rug! Sorry the last reply got cut off, my Realtwhore was phoning in!
“‘The outlook for real activity faces a number of significant risks, including the possibility that house prices and construction could retrench sharply and that energy prices could rise significantly further,’ Federal Reserve Vice Chairman Roger Ferguson said on Friday.”
Are worries about these risks part of the reason Ferguson is leaving the Fed soon? Or does the fact that he is leaving soon explain his frankness? It is hard to separate the chicken from the egg in this case.
http://money.cnn.com/2006/02/22/news/economy/fed_ferguson.reut/index.htm
“Australia has experienced a decline in real house prices over the past year. One difficulty in interpreting the foreign evidence is that gauging the direction of causality is difficult, that is, are adjustments in house prices causing a slowdown in real economic growth or is a slowdown in activity causing the adjustment in house prices.”
I would say the direction of causality runs from Central Bank tightening to falling home prices. AU’s CB was a year ahead of the Fed, and so are the declining home prices…
One big piece of the puzzle missing in the overseas housing declines is that the US was in a major expansion. As we’re often told the US consumer is what drives the worlds economic engine, a US recession should push Australian and UK home prices down even further.
absolutely, positively spot on. This is the “key” that I think a lot of people are missing. You can “lose” housing bubbles in economies like Australia and the U.K. and the broader economy can do okay with the world’s largest economy (the U.S.) doing great. But if we start rolling over due to a bursting bubble, then all bets are off — and that’s just one reason our bust will be a lot worse than people are giving it credit for.
Systemic risk rears its ugly head…
Ben - Australia is a major exporter - of raw materials. They have fed the Chinese infrastructure expansion and have had a hell of a run. If we can assume that the Chinese have paid the Australian’s with their income from supplying WalMart, a housing slowdown here just may be the mother of all dominoes.
There is a very good report from the OECD (from 2005 if I remember correctly) about how the mild recession in the Netherlands in the last years can be directly attributed to the preceding housing bubble.
As soon as the double-digit growth in home prices stopped the economy got sour; within 2 years the Dutch economy went from one of the best performing in Europe to the worst of all EU member states. And that was with pricegrowth just slowing from yearly double-digit to single-digit and no tightening from the banks. The bubble simply had exhausted itself for the moment (but it’s growing again now).
Although the US economy is very different, it looks likely to me that we will see a similar effect there if the current slowdown lasts a little longer, because the mechanisms are similar on both sides of the ocean (propping up consumption with home equity, bad allocation of investment money etc.).
If the housing appreciation was a bubble, then bursting of the bubble may have nothing to do with changes in “fundamentals” but rather changes in market expectations. In that case, the bursting bubble has the potential to create serious problems in financial markets, which will lead to credit tightening, which will lead to less economic activity.
Money (better yet, credit) makes the world go ’round!
>>>>Money (better yet, credit) makes the world go ’round!
Bingo. You nailed it. Helicopter Ben can print all the money he wants, but if people say “no” to borrowing … the asset inflation game is over and prices will come down hard.
In come the waves
Jun 16th 2005
From The Economist print edition
The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops
Good article but near the bottom is a graph showing the bubble in the US, Britain & Australia is actually bigger than the one in Japan:
http://www.economist.com/finance/displayStory.cfm?story_id=4079027
[“‘Given the limits of what we know about the future path of housing prices and about the implications of any particular house-price scenario for real activity, the Federal Reserve will have to continue monitoring this area closely.’”]
And do what exactly? The Fed is in a corner 1000 ways right now. Pretty soon they’ll need to reform the way they calculate real inflation which by any measure is grossly understated. Then what? Lower rates agian to fight the dropping asset prices that they said they refused to touch?
The MBS institutions are looking weak.
Pretty soon they’ll need to reform the way they calculate real inflation
easy - just substitute declining home prices instead of rents in the CPI calculation
some EU countries are already preparing for this statistical switch.
http://www.sciencentral.com/articles/view.php3?article_id=218392747&cat=3_all
Housing Bubble Science
Those who live in earthquake zones know their houses could one day come crashing down. But UCLA geophysicist Didier Sornette says he used the same theory that can help predict earthquakes, to pinpoint when the U.S. housing market would crumble. He says the warning signs have been building for a few years.
As reported in Discover magazine, Sornette studies what’s known as “complexity theory” to try to predict how a system will behave in the future. He uses physics and statistical analysis to look at the organization of the dynamic parts of a complex system, and how these parts interact to cause something major to happen. For example, when a multitude of physical changes affect the organization of the earth’s crust to produce an earthquake.
“It emphasizes the whole more than the parts, it emphasizes the interactions and what we call the feedback,” he says.
image: Zhou and Sornette
The interplay of the elements is affected by both positive and negative feedback. Negative feedback is often obvious. For example, when real estate prices are inflated many people decide to sell with the hope of making a nice profit. Eventually more houses are available for sale than there are buyers, so the prices start to drop back to normal. “Positive feedback is exactly the opposite. A high price pushes the price still higher,” explains Sornette. “This is the expectation of people that lead [people] to buy houses at prices that they would never have bought otherwise and taking supposedly big risks… first buyers, for example — you’re a young couple relatively at the early stage of your life and you think, ‘Well if I don’t buy now… .’”
Applying complexity theory to the interplay within the real estate business, Sornette saw that a housing bubble has been building in 22 states, mostly in the northeast and western U.S., since 2003 — and has now reached bursting point. In 2005 he predicted that in the first half of 2006 prices would level out or return to normal rather than crash.
“It’s absolutely non-sustainable,” he says. “This bubble is basically ending now, and has, has ended in some cases… and now the market is transitioning into a more stable kind of plateau.”
hmmm - Sornettes theories are interesting, but he has made many false predictions (e.g. in the last years regarding the US stock market). His predictions from a year ago for the housing markets in the UK and the US were not very useful either.
I think his work is most of all valuable for detecting the ‘cracks’ that point to a major trend change.
The timing of earthquakes and housing crashes are notoriously hard to pinpoint…
http://en.wikipedia.org/wiki/Iben_Browning
He adds that, “True complexity is based on surprises, and we don’t really have any mathematical way of dealing with surprises at this stage.”
Bingo! The “surprise” is a change in people’s expectations. During the bubble, people (incorrectly) come to believe that prices will rise higher and higher. At some point, they realize their folly, and prices come crashing down.
But since we can’t measure people’s expectations, we cannot be sure if a bubble has formed or when it will pop.
not quite - with chaos theory one can often recognize the signature of unstable situations. You cannot predict what will follow, but sometimes you can say with near certainty that change is in the air.
Well I can’t see how prices will somehow explode to the upside, given the current enviornment: all-time high prices, interest rates moving higher, all-time high home ownership numbers, all-time low affordability. You get the picture. If chaos theory is detecting an unstable situation in housing at the moment, a crash to the downside is the logical outcome. All the hyper-inflationists may take exception to this, but I don’t see escalating wages anywhere on the horizon.
My guess: Chaos theory would favor a resolution of the current instability towards either a housing crash or towards runaway inflation followed by a housing crash; soft landing? NO WAY.
When is everyone going to realize that the lending institutions and the RE agencies have perpetrated the biggest Ponzi scheme on the American public to date. The ole song, “I owe my soul to the company store” has come true, but instead of the mining company its the banking industry. What everyone has failed to throw into the mix is the propensity for divorce when finances get tight, and that will churn property at an ever increasing rate.
you should also realize that it is not just a Ponzi scheme for the American public, but a worldwide Ponzi scheme (at least for the whole anglosaxon world - most of all because they all depend on the same central bankers).
I have heard the “company store” theory from several of my friends over the past couple of months. The 90’s provided the people of the United States with decent job’s, wages, and affordable housing. The central bankers did not like this because we worker bee’s were getting caught up and comfortable. Inject outsourcing, lower wages, higher health care costs and escalating housing costs into the mix and the central bankers put the worker bee’s right back to where they wanted us.
Please be realistic. Inflationary monetary policy has been going on since the mid to late 1980’s at the very least and the dollar has lost 92% of its value since 1913. The 90’s were just another episode in the modern Greenspan boom/bust cycle fueled by ultra-easy money, stock and bond bubbles. The current housing bubble is just the latest (and probably last) iteration of this dynamic. I agree that the central bankers have perpetuated this re-distribution of wealth, but I disagree that this process started anytime recently.
http://video.google.com/videoplay?docid=8442305921010099392
http://video.google.com/videoplay?docid=5020331178524208549
http://video.google.com/videoplay?docid=5020331178524208549
These links will bring you to an explanation of how the money manipulation works and who is behind this. Be prepared to get your world rocked.
I was unaware that artifically low interest rates along with no lending standards was “Fundamentally sound”. If we had just stuck with 20% downs and full income documentation we could have had both reasonably low interest rates and mild appreciation over the past few years. But No, we had to delay a mild recession in return for a worse reccession later.
I was reading down the list of comments to see if this quote had yet been mentioned.
For this Fed bozo to say that the artificially low rates were a “fundamentally sound” reason for the price appreciation of the last few years is ridiculous. It, however is the fundamental reason behind the appreciation - just not very sound.
SWZ - switzerland 12% over 7 years !
the soundest economy in the world-
don’t forget Germany - not exactly in perfect shape, but still an economic powerhouse with huge industrial output - and absolutely NO housing bubble (probably minus x % over the last 10 years).
Yes, but I think that has less to do with sane economic policy and more to do with hundreds of thousands of Soviet-era housing units being vacated and dumped on the market. The fact that Germany’s population is declining, even taking immigration into account, does not help things.
Germany has over 10% unemployment, and no way to end the bleeding from out of control social givewaways.
Basically he said “When housing collapses it’s because the economy sucks” which means they don’t take heat for causing this bubble which is what’s really going to take down the economy.
Like climbing into an elevator at the top floor of a tall bldg and hearing a dope ask, “Going down anyone?”. Everyone is going down. The only questions is which floor are you going to get off on. The door isn’t shut yet but I expect a lot of pushing to get through it…
Gee, Captain Obvious to the rescue.
Somebody please hit this man with a board in the back of the head.
Boring post followed by GREAT COMMENTS as is (normally, usually, occasionally, always) what keeps us here.
Thanks!