From the Wall Street Journal:
Overseas Analogies
By JUSTIN LAHART
“Ever since the U.S. housing slowdown became apparent last year, investors have cast a wistful eye toward the United Kingdom, hoping its soft landing will be a prelude to a similar experience on this side of the Atlantic.”
“As in the U.S., Britain’s housing market looked like it was overheating a few years ago — then kept heading up. When the U.K. market stalled last year, the Bank of England took the precaution of cutting its key interest rate, helping to stabilize its housing market. If it happened in the U.K., why couldn’t it happen in the U.S.? In a speech earlier this month to bond investors, none other than Alan Greenspan, former Federal Reserve Chairman, pointed to the potential parallel. But the analogy might not be perfectly apt.”
“Mortgages in the U.K. are closely tied to short-term interest rates, while U.S. mortgages are generally linked to longer-term interest rates. That gives the Bank of England more direct influence over the U.K. housing market, since central banks control short-term interest rates, while market forces drive long-term rates. The Fed could reduce its short-term lending rate and long-term interest rates could keep rising on, say, mounting inflation worries, putting strain on the housing market.”
“Australia’s housing market may have avoided trouble for a similar reason — commodity prices boomed last year, and Australia is above all a commodity producer.”
“Finally, while prices in the U.K. may have gotten even more excessive than in the U.S., U.S. households put themselves more at risk than their U.K. counterparts by borrowing against home equity to fuel spending, notes Goldman Sachs economist Jan Hatzius. British households were burned by this in the early 1990s, he says, and thus were more conservative than Americans this time around.”
“Of course, this doesn’t mean the U.S. housing market is bound for a hard landing. But it does mean investors should be careful about taking too much comfort from analogies abroad.”
From the WSJ:
“Inflation Fears Loom Over Treasurys”
Lehman’s Mr. Shin said that, with inflation pressures increasing, he expects to see yields “tick higher in the near term,” as the market begins to price a June rate increase into the curve. Lehman Brothers expects the 10-year rate to be close to 5.25% by the end of the quarter.
Morgan Stanley’s Mr. Flanagan agreed, saying that, with the two-, three- and five-year yields all well below the 5% fed-funds rate, government securities “seem somewhat on the expensive side.” He sees the two-year yield around 5% and the 10-year rate at 5.15% come the end of next week.
Just because Bernanke pauses, it doesn’t mean the Bond market won’t continue to raise raise rates for him.
Note: Remember that mortgage spreads to Treasuries can blow out, so in the instance of a market dislocation where there is a “flight to quality” in to Treasuries, you can still see mortgage rates stagnate in the face of a Treasury market rally.
Last time around (late 80’s/early 90’s), the Fed cut rates and probably averted what could have been a much sharper decline in housing. The Federal Funds rate was around 9.0% in Sept. 1989. By Sept. 1992, the Fed cut rates to 3.0%. This time around we don’t have room for 600 basis points in cuts. Housing prices still fell during that time. With inflationary pressures looming, cutting rates at this point would basically cannibalize the dollar and may only served to give the housing bubble a temporary stay of execution.
IMHO, the only chance at a rate cut would be if we clearly enter into a recession, housing prices are clearly heading down and the risk of inflation subsides. Then Bernanke would likely attempt to “mop up” the mess with rate cuts once the bubble risk passes.
When the U.K. market stalled last year, the Bank of England took the precaution of cutting its key interest rate, helping to stabilize its housing market. If it happened in the U.K., why couldn’t it happen in the U.S.? In a speech earlier this month to bond investors, none other than Alan Greenspan, former Federal Reserve Chairman, pointed to the potential parallel. But the analogy might not be perfectly apt.”
Does it mean if Prices go down by 20%, FED will reduce rates to keep market from going down? If that happens, than Prices won’t go down much as folks are predicting.
Prices are going to go down no matter what the Fed does. The amount of speculation, and over leverage is much greater in this country then in the UK.
Plus the cat is out of the bag so to speak, buyers that are out looking now, are seeing prices being lowered, and in many cases substanially. In the meantim inventory is exploding, and we are past the peak of the prime spring selling season. Inventory in my town has tripled in the last three weeks, even I am surprised, and what is more telling is the few that do go under contract, they are coming back on the maket, as either the buyers change their minds, or they cannot get the financing from the banks etc.
People have to understand, this has to happen, the system needs to be cleansed, and nothing is going to change that.
People have to understand, this has to happen, the system needs to be cleansed, and nothing is going to change that.
I agree. This is why I think the Fed will wait until after the burst to cut rates. Bernanke has already said that he won’t save the bubble, but will mop up the mess.
“what is more telling is the few that do go under contract, they are coming back on the maket, as either the buyers change their minds, or they cannot get the financing from the banks etc.”
I’m seeing this as well — houses that were past Attorney Review and “Under Contract” come back on the market 3 to 4 weeks later.
I wonder if those who bailed managed to get away with their deposits.
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