Ben Bernanke(sounding more worried by the minute) came out today and pleaded for the banks to take drastic measures to restore health to the housing market.
Some of his excerpts:
``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''
Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments, indicating that he sees housing as a serious threat to the economy that can't be addressed by fiscal or monetary policy alone. The Fed's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments. "
My interpretation:
Ben realizes cutting FED rates will not do anything to help the housing markets. The FED rate cuts have done nothing to lower mortgage rates so far. The bond market sets these rates and during a normal financial business cycle FED cuts did lower mortgage rates because the banks were healthy and had cash and were willing to lend. Remember when Greenspan dropped the FED rates to 1%? The result was a housing bubble. Well this is not your average market.
Lowering rates back to 1% to reinflate the bubble will not work and cannot be done today. The reason is three fold. RISK, FEAR, and AFFORDABILITY are now in the marketplace.
A great comparison to this debt crisis is Japan. Japan tried to drop rates back down when their housing bubble burst in the late 80's. Japan actually took rates to ZERO and guess what happened. NOTHING. You can buy a house in Japan for about the same price today as you could in 1989. Zero appreciation over almost 20 years. People got so burned that they never came back. Expect the same thing here. how many people have had a realtor tell them their is only so much land and now is the time to buy. Next time ask them well why didn't prices go up in Japan for 20 years where there is no land!
OK now back to the three reasons why the FED rate cuts won't bring back housing:
RISK is back because of foreclosures. Banks have learned the hard way that when you lend people money there is a chance they might not be able to pay it back. As a result even if rates went to zero they would not offer the loan products like subprime again because they got burned.
The FEAR factor is mainly the lack of trust between banks. Wall St. sold banks bad loans all over the world. European banks did the same thing amongst each other. The result of this is none of them trust each other anymore. This fear has spooked the bond market and kept mortgage rates higher. Banks also don't know how much bad debt their fellow financial customers have which just enhances the fear factor. As a result the availability of money vanishes. this hits the home buyers in the form of tighter lending and higher rates. Until the FEAR is gone the FED rate simply doesn't matter.
AFFORDABILITY. Prices must come down people. Somewhere around 30% nationally on average IMO. Some areas need to come down by 50% (CA,NV,DC,FL, AZ). The bottom line is with tighter lending housing needs to be affordable so people are able to QUALIFY for the loans. Until this happens we will be in a standstil and the inventories will grow which will push prices down even further. Supply and demand people!
The ONLY way housing will recover is when housing prices drop back to affordability, the banks open their books and show TRANSPARENCY, and the system is regulated in a trustworthy manor. Appraisers need to be independent and regulated and not pressured by the banks. Fanny and Freddy are trying to get this started but we will see. The ratings agencies like S&P and Moody's can no longer be paid by their customers(Wall St.) to rate bonds.
What Ben was saying today is this problem cannot be solved by the FED and the banks need to take action. The financials did not like this idea and were beaten down badly in the stock market today. Ben also has something to worry about that wasn't around for the last 15 years. Inflation. Anyone buy a gallon of milk or an ounce of gold lately?
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