Why the Latest Fed Stimulus Won't Help Housing

The government's latest plan (as of today, November 26, 2008) has the Fed buying mortgage-backed securities from Fannie, Freddie and the gang. I'm OK with the program in general, but here's a bit of hubris I cannot tolerate: the claim that it will help the housing market.

Housing consists of owner-occupied (or increasingly owner-unoccupied) plus rental housing. The proportions are roughly two-thirds owned, one-third rented. Bringing down mortgage interest rates will help one sector of the market, but only at the expense of the other. As I showed with charts in this post from a couple of weeks ago, we have an excess supply of both types of housing. There is no solution to the excess supply of housing other than to have a good-sized fire, or grow our population. The latter solution works, and works well, but at a slow pace. We grow our population by about one percent per year, so we'll eventually grow to fit our housing stock.

Here's what I like about the plan: It silences critics of the Fed who say that they don't have much room to ease monetary policy. Sure, the Fed Funds rate is less than one percent, so the usual interest rate that the Fed influences cannot be moved much further. But the Fed can conduct monetary policy in any number of instruments, including mortgages. (Many years ago, the Swiss wanted to conduct open market operations but there were no Swiss treasury bonds outstanding, because the country had been running a balanced budget. So their central bank conducted monetary policy buying and selling mortgages rather than treasuries. No problem.)

Comments

[dw57:]

i doubt it can do any thing really about the housing market. and thats because wages haven't kept up. and in todays world aren't going to change much any time soon. so housing prices have only one thing they can do and that is fall. the omly question will be can they catch up with wages that are going to be in free fall also?

2008 Nov 26 05:03 PM

[jepittman:]

The problem has been falling house PRICES. The lower mortgage rates will lower the payments for people wanting to buy and increase affordability. More houses being purchased should slow the price declines. It will be somtime next year before family formation (demand) catches up with supply but allowing consumers an opportunity to refinance and lower their payment will hopefully slow the forclosure rate. Home Depot and Lowes are both up nicely recently so somebody likes this.

2008 Nov 26 05:33 PM

[sickofthehype:]

The issue is that the spreads are enormous on mortgages. Banks are making a huge spread to compensate for their previous losses and poor decision making. Just in the past few days have we seen end rates drop dramatically, as they should, and if we can get this continuation until we have 4.5% 30-yr loans, that would help the most out of all of this. And I wouldn't be surprised if we get there.

For those preaching about how prices still have to drop - here in Phoenix there are lots of areas that are at 2000-2001 prices! The pendelum has swung too far, as it generally does, and another thing is that our inventory has DROPPED every month this year, and has have INCREASED every month this year. No, I'm not a real estate agent, but I keep track. Things are happening that are positive, but of course the mainstream media won't tell you about it. And today's new home sales being the lowest in 18 years? Well, GOOD!!! Permits down to record levels too. PERFECT!!! Once this tract home cookie cutter crap gets stopped from being built, then we can concentrate on getting inventory sold off and re-sales back on track.

And finally, the inflation that will result from all of the cash injections to our system - globally - will make you WISH you owned some real estate. The fix is in folks. 2009 will be interesting.

2008 Nov 26 05:41 PM

[25 year App...:]

Give it a chance......only been a few days.

Ive seen an explosion in business with the mortgage rate decline of the past week.

Want to get the Homebuilders to stop whining about a bailout?......lower mortgage rates.

Happy Thanksgiving

2008 Nov 26 06:16 PM

[Obviously D...:]

Algebraically speaking you could increase the number of houses per capita, also. Vacation homes anyone?

2008 Nov 26 09:00 PM

[bobbobwhite:]

Another huge economic problem in America is expanding gross citizen lack of confidence in all things gov't. The recession deepens each month, and incompetant and confused, immensely expensive measures are experimented by our conflicted gov't to try to help what it caused in the first place, much of that through selfish, criminal behavior and not incompetance alone. But, industry, energy, housing, retirement accounts, consumer spending, et all are still suffering greatly, even as trillions of new taxpayer dollars and endless borrowed debt is being spent by the gov't in its lame efforts to help everything at once in not a specific, concerted manner, but in a scattered shotgun manner that changes daily with each news report.

When will consumers/taxpayers gain the confidence necessary to help start to turn this disasterous aircraft carrier called the American economy around when all they have are toothpicks for paddles? Thoughtfully provided by our federal gov't, of course.

Don't look for improvement any time soon. Way too much has been left criminally misattended too long for any quick fix.

2008 Nov 28 11:54 AM