The Problems That Lie Ahead for the Housing Market
Thursday, August 17th, 2006
By Michael Lombardi, MBA for Profit Confidential
After the 9/11 catastrophe, then Federal Reserve Chairman Alan Greenspan immediately dropped interest rates fifty basis points in the Fed’s attempt to calm the financial markets. After 9/11, the Fed continued to lower interest rates until they fell to a 46-low in the summer of 2004.
What I’ll never understand is why the Fed permitted interest rates to fall so low. By lowering the Federal Funds rate to 1% in the summer of 2004, the Fed started a sequence of events that led to “froth” in the real estate market and the financing market.
Does the Federal Reserve understand human behavior? The lower rates go, the more consumers borrow–even if they don’t have the capacity to repay the debt they accumulate. The lower rates go, the more finance companies preach the benefits of refinance so consumers can borrow more money on their homes thus increasing their debt burden. The lower interest rates go, the more speculation enters the property market.
Simply, with rates having moved so low, the Fed created a borrowing frenzy. Now, with rates having moved back up, those consumers who over borrowed are feeling the ramifications of their lack of fiscal sense. In the years to come, we will pay for the excessiveness of the borrowing binge of this time period. We will pay the price.
Maybe it’s not Greenspan’s fault. Possibly, he felt he needed to bring rates so low so as to keep the U.S. economy from falling into recession. But you can only put something off for so long. At some point, the natural cycle of the market, and of the economy, will prevail.
But I do have to give Greenspan credit for this: Before he left office he clearly stated the housing market would cool because price appreciation in that sector had been too aggressive. And cooling it is. In fact, I don’t think the U.S. housing market could be softening any quicker than it is. Look at how long it now takes to sell a house in previously hot markets. Look at how the big home builder stocks are taking it on the chin. Look at how prices are softening. These factors are only small indicators of the problems that lie ahead in the U.S. housing market.
NEWSFLASH–In July, U.S. consumer prices rose at the slowest pace in five months. Deflation is definitely a looming problem for the U.S. Federal reserve. We now have both the consumer price index and the producer price index indicating price growth has come down to a snail’s pace.
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Tags: federal reserve, housing market, real estate market, U.S. housing market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
