How the Tune Changes

What every financial market follower expected to happen yesterday happened: The U.S. Federal Reserve left interest rates unchanged again.

The big news, though, was the Fed’s change in opinion on the housing market. Yesterday, the Federal Open Market Committee, the people that set interest rates in the U.S. led by Chairman Ben Bernanke, called the cooling of the housing market “substantial.”

Early in 2006, the Fed was downplaying the role a correction in the housing market would have on the economy. Even past Fed Chairman Alan Greenspan was quoted as saying that the worst for housing was over. My, how the Fed has changed its tune!

I’ve been writing for months on how analysts, economists, and the Fed have underestimated the effects of the housing price correction on the economy. Now, they’re finally starting to get it. Maybe it’s because I used to be a real estate man, and I know how long changes in the housing market take to filter through the economic system. Maybe it’s because I know how inexperienced many of our policy makers and analysts are today. After all, isn’t the Fed still obsessed with inflation when deflation could be on the horizon?


As the CEO of the huge Countrywide Financial said back in August of this year, “I’ve never seen a soft landing (in real estate) in 53 years.”

As Ken Heebner, who manages the $1.2-billion CGM Realty Fund said this summer to the Wall Street Journal, “A significant decline in prices is coming. A huge buildup of inventory is taking place, and then we’re going to see a major problem in hot markets like California, Arizona, Florida and up the East Coast. These markets could fall 50% from their peaks.”

The price correction in the housing market is far from over. So is the pain that both consumers and the economy will experience because of it.