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http://www.businessweek.com/stories/2006-02-02/will-housing-make-bernanke-cranky

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Will Housing Make Bernanke Cranky?


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| Help for Cash-Poor, House-Rich Senior Citizens ?

February 03, 2006

Will Housing Make Bernanke Cranky?

Peter Coy

He's genial. Personable. Open. He's Ben S. Bernanke, who this Wednesday succeeded Alan Greenspan as chairman of the Federal Reserve Board.

But Bernanke might get a little cranky in the coming year if Goldman, Sachs & Co. is right about a coming slump in housing.

Read on ....

Goldman economist Jan Hatzius argues that softness in housing will be such a drag on the economy that the Federal Reserve, which has been steadily cranking short-term interest rates higher, is going to have to turn around and start cutting them to keep the economy from tanking. He's looking for a full percentage-point cut in 2007.

Here are Hatzius' bullet points:

**Houses are about 15% overvalued nationwide, ranging from 50% overvalued in Los Angeles to not overvalued at all in Houston.

**Housing construction, which is the highest share of GDP in half a century, will slow. And people will pull less cash out of their homes (through cash-out refinancings, etc.).

**Together, these drags will subtract 1.5 percentage points from the economy's underlying growth rate. For the past two years, housing's strength has lifted economic growth about 1 percentage point above its underlying rate. All told, then, the downturn in housing from will subtract 2.5 percentage points from GDP growth.

**Ben Bernanke probably isn't going to react right away. He'll wait until there's concrete evidence that a housing downturn is hurting the economy. "If and when that slowdown arrives, however, the response is likely to be fairly aggressive."

02:14 PM

Economy

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? Should Home Buyers hold off buying for 2006? from Pacesetter Mortgage Blog

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Source: Charles Atlas

In Peter Coy’s insightful post Will Housing Make Bernanke Cranky [BW], he discusses Goldman economist Jan Hatzius [BW] argument that the “soft landing” that has been described more times than can be legally b... [Read More]

Tracked on February 7, 2006 11:24 PM

We know this. Bernanke is inheriting a housing market that has experienced an extreme bull market for the past 4 years. What else would be expected, as the correction already started.

In addition, the bond markets are already betting on a coming recession. The idea that Bernanke will be facing a tough situation in the next 2-4 years is known, he will have to cut rates. Just by how much, for how long, and how he handles the public in regards to his future actions is the uncertainty that no market likes; especially the equities markets.

Posted by: UrbanDigs at February 3, 2006 07:54 PM


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