Will Housing Make Bernanke Cranky?

Posted by: Peter Coy on February 3, 2006

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

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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."

Reader Comments

UrbanDigs

February 3, 2006 7:54 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.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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