US housing slump may prompt Fed to reduce rates

[NVMojo]

NEW YORK (Reuters) - The Federal Reserve may have taken on more than it bargained for in its inflation battle.

Signs of a crumbling U.S. housing market and worries that the slump may hurt the overall economy are feeding the idea the central bank will be forced to trim short-term interest rates sooner than many had forecast.

"If the Fed feels that there is enough downward pressure on the economy from housing -- and there's enough indication that inflation is not the concern that they thought it was -- I could see them lowering interest rates," said Eric Belsky, executive director at Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts.


Federal Open Market Committee officials remain concerned about inflation but acknowledged risks to the growth outlook this week by voting to keep the overnight federal funds rate target at 5.25 percent for a second consecutive meeting.

more...

http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=2006-09-23T184355Z_01_N22613431_RTRUKOC_0_US-ECONOMY-FED-HOUSING.xml

[skids]

1. Hrm they bounced off the rock. Next stop: hard place.

Between an economy that relies entirely on debt to (pretend to) survive and a dollar that's coughing blood -- I wonder how many times it will rebound back and forth before there's no space left and the big pinch really starts.

[Warpy]

2. That's not going to help because the Fed is ignoring the real

issue, WAGES. If people didn't buy that house before the speculative market took off about 5 years ago (10 years on the coasts), they are basically screwed as good jobs have departed and only service jobs are left.

Market saturation is another problem. There is now a housing glut in many areas (like mine) and fewer and fewer people who qualify to buy them. Low interest rates won't offset low wages and superfluous housing stock is not going to move.

Hyper inflation fueled by speculation is another, people addicted to the stock market boom of the 90s trying to make that kind of money elsewhere by buying real estate, sitting on empty houses for a couple of years, then selling them for an obscene profit.

Debt loads are another problem. People have compensated for declining purchasing power by charging up credit cards for things they should have been able to pay for out of living wages. If someone carrying credit card debt isn't already in a house, he's not going to get into one until that debt is paid down.

Housing is just the first place to feel the effect of offshoring paychecks while onshoring debt. The system is unsustainable, and a decrease in the prime rate is not going to cure it.

[shireen]

3. i'm really really angry

i'm house-hunting right now and I can't even afford "starter" homes in some of the middle-class neighborhoods I'd like to live in ... I read everywhere that it's a buyer's market. Not really. The simple truth is that home prices rose so steeply over the past few years, far outpacing cost-of-living increases, that it will never, as the so-called experts claim, "normalize", whatever the hell that word means. (I'm speaking about the crazy markets, like the coastal cities.)

I'd take Warpy as Fed chairman anytime over Bernanke.

[Warpy]

4. Thanks, but I don't want the job. I'd be assassinated

within a month.

As to the house prices, for all the reasons I cited, they will be coming down. How far down is anyone's guess. It all depends on how desperate people paying more than one mortgage get in the next few months. Hold onto your cash for now.

The only reason it's being called a buyer's market now is that the buyer can demand extras (like including the washer & dryer, fridge and some furniture) in the inflated sale price of the house. Qualified buyers have a great many choices, and only the move in ready places are selling.

[NVMojo]

5. Finally, a sane voice. I've been wondering myself when the "World is Flat"

crowd was going to realize they were buttbonging the American economy ...good jobs lost to overseas, housing bubble bursts, how's everyone going to be able to figure it all out when it is over? Bring housing prices down so that McDonald's shift workers can afford them? Or maybe the average teacher? Yeah, right ... Fuck the service industry.:sarcasm: The middle class must make more money then that!!! HAHAHA!

[lgn19087]

6. If the middle class can't afford the housing

The price will come down. If housing is too expensive, prices come down. If prices are too high, demand is too low, and prices come down. Weren't you listening in high school economics class?

[Warpy]

7. That's only the case when speculation fueled by easy credit

and creative financing like ARMS and the interest only "balloon" mortgages starts to dry up. The middle class hasn't been able to afford anything in places like Silicon Valley for ten years unless they took advantage of these financing scams, and even then they were the definition of the house poor, spending enough of the paycheck on the mortgage that there was little left over to live on.

The boom should have gone bust several years ago and would have, were it not for speculators eager to get the same returns they had in the stock market in the 90s. 26 years of a skewed tax system made sure they had plenty of funds to leverage enough debt to fuel a speculative market.

The free market stuff being taught in high school and undergrad economics classes assume that nothing else is being added to manipulate the market. In a heavily corporatized country with huge wealth disparity, that is rarely going to be the case.

[NVMojo]

8. lgn19087, your point is???

[lgn19087]

9. the point is

that these things work themselves out.

[NVMojo]

13. wow, I don't think anyone here knew that!

[momzno1]

10. there is no saving this market

People are wary, house flippers are stuck with property that they can't unload. Those of us who might buy (myself included) are waiting it out for awhile. I see prices dropping 30-40% over the next couple of years. When I can buy a house for cash in my neighborhood for $150,000, then I will buy again. Cheapest houses here now are around $300,000.
But, I sit, rent and earn interest on my cash now.... I can wait.... no problem.

[Quakerfriend]

11. You are smart to wait it out. I just sold my mother's house which

is in a beautiful suburb of Philadelphia. The area is 15 minutes from center city but, it feels as though you are out in the country.

We put the house on the market in Nov 05. Had lots of people go through. We turned down one offer 18% below the asking price in Dec 05. No other offers until last week. We sold it for 26% below asking price- And, it was not over priced.

My husband and I just bought, as well. We think we made out. The house is in a very popular area and had been on the market for 50 days. We got it for 25% below asking. But, things will probably will go alot lower.

I agree we you when you say we will likely see a 30-40% drop. I think it is happening alot faster than predicted. Just last month Phila magazine said that 'prices in and around Phila' would continue to appreciate but, a bit more slowly, at 10-15%/annually. And, that the area would not experience much of a $ drop in value. Not true, thus far. But, not nearly severe a drop as in places like San Diego.

[momzno1]

12. Congrats to you Quakerfriend

sounds like you got out just in time, as did I, mostly because we were not greedy and insisting that we get top dollar, like so many sellers are these days.
Good luck in your new place!