Skip to comments.Housing And The Fed: A Low Rate, Multiplier And Velocity Recovery?
Posted on 03/28/2013 9:31:37 AM PDT by whitedog57
Nick Timiraos at the Wall Street Journal wrote in interesting piece yesterday called Home Prices Seen Making Stronger Gains in 2013. Numerous analysts have upgraded their forecast for house price growth for 2013, primarily based on limited inventory and growing demand.
And then Fed of Minneapolis President Narayan Kocherlakota reinforced the notion that The Fed will keep the pedal to the metal (MORE asset purchases) even if unemployment falls below 6.5%.
Bloomberg News reports that Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, in a speech he gave on Wednesday, said the Feds Open Market Committee may choose not to raise the main interest rate when the jobless rate falls below 6.5 percent. Kocherlakota said, The unemployment rate threshold is not a trigger for FOMC action. Bloomberg notes the FOMC affirmed last week it will keep the federal funds rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation does not exceed 2.5 percent.
I must admit, stars are aligned for a good year for house prices.
The Supply Side: Limited Inventory
Inventories of homes for sale (NAR) are back to levels not seen since the early days of the housing bubble.
At the same time, housing inventories that have been held off the market are far above early bubble levels. So there is still more hidden inventory to work through.
The Demand Side: Population Growth
While housing inventories for sale are at early 2000s levels, the US population continues to grow. So simple population growth will put pressure on limited inventories resulting in higher prices.
The Demand Side: Historically Low Mortgage Rate
Thanks to The Feds massive intervention since 2000 in markets (and Europes continuing meltdown), mortgage rates near an all-time low. The Bankrate 30 year fixed average is the white level, The Fed Funds Target rate is the red line.
This, along with the crash of house prices, has led to increased housing affordability, the highest it has been in a long time.
So, whats not to like? Low mortgage rates, relatively low house prices, rising population.
Here is what NOT to like.
Mortgage Applications Remain at Pre-Bubble Levels
Applications for mortgage purchases remain in a rut at the end of what Chris Whalen from Carrington calls the Sanders Polynomial. Despite record low mortgage rates, credit remains tight after the housing bubble burst.
Economy Remains Weak: M1 Money Multiplier Remains Below 1
The M1 Money Multiplier has remained below 1.0 since the recession indicating that for every $1 increase in the monetary base the money supply only increases by 84 cents. Thats not good!
Economy Remains Weak: M2 Money Velocity Is At All-time Low
And the M2 Velocity of Money Stock has plunged to an all-time low. Essentially, this means that growth in the money stock is barely helping increasing GDP.
Slow Employment Recovery
The Fed wants to keep rates low even after the 6.5% unemployment level is breached. Odd, since the money multiplier and velocity are so low. But many love cheap money (except savers). U6 unemployment and parital unemployment (the deadly serpent) remains very high and is slowly improving.
The employment to population rate is likewise disturbing. It is back to Jimmy Carter levels. And we are looking more and more like Japan (aging population which changes the type of housing that will be demanded).
Household Income Continues to Decline
I have said this before. Wages and salaries continue to fall as a percentage of GDP.
And REAL household income continues to fall.
There are many more headwinds that I could list, such as the incredible increase in insurance premiums (thanks to Obamacare) that kick in for 2014.
In summary, we have a Fed-induced low mortgage rate recovery with minimal money multiplier (below 1) and money velocity. Cash investors (30% of the house sales) are driving the market along with population growth.
Cash is King.