While there is no magic bullet to solve the three-year long housing crisis, Ben Bernanke and the Federal Reserve are doing all they can to help. The massive $600 billion purchase of treasury securities announced last Wednesday initially has had a positive impact on long-term interest rates. Bringing mortgage rates down is a principal objective of the Fed action.
At the Fed's weekend gathering at Jekyll Island, Georgia, Bernanke defended the latest round of QE, saying "standard considerations suggest we should be using expansionary monetary policy." Earlier he had written in The Washington Post that "easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance."
With mortgage rates already at their lowest level in nearly 60 years, how low can they go? Economist Mark Vitner of Wells Fargo predicts that by spring a 30-year mortgage loan could fall to around three percent That would be a full percentage point drop from the current rate. Others are not so sure. Jay Brinkmann of the Mortgage Bankers Association says QE will merely support rates near their current levels and won't bring them lower.
Lower mortgage rates alone won't spur a housing recovery. If they did a recovery would already be underway. There is still a huge inventory of homes that need to be cleared from the market. In addition, the foreclosure crisis is still not resolved and a growing number of foreclosed homes are yet to come onto the market. This puts additional downward pressure on home prices.
During this dreadful three-year period for millions of homeowners, home prices nationally have fallen by nearly 30 percent, while nearly 25 percent of all borrowers -- some 15 million homeowners -- owe more on their mortgages than their property is worth.
Vitner believes home prices will fall another 6 to 8 percent before bottoming in the spring. Mark Zandi of Moody's Analytics in West Chester, PA says home prices will remain depressed into 2012. "We're not at the bottom, but we're getting close," he says.
Most economists agree that housing can't recover without significant job growth. Friday's report of a 151,000 increase in October employment is obviously good news even though the unemployment rate remains unchanged at 9.6 percent. Maury Harris of UBS in New York believes monthly employment gains in the range of 150,000 may be enough to boost confidence and stabilize the housing market. He foresees economic growth of 2.7 percent in both 2010 and 2011 with the jobless rate remaining in the 9 percent range.
Vincent Reinhart, a former top official at the Federal Reserve who is now a scholar at the American Enterprise Institute, has been a leading advocate of quantitative easing. He recently told Barron's that with deflation currently more of a threat than inflation, there was ample opportunity for additional monetary stimulus. "Even critics will have to admit," he said, "that quantitative easing pushes the economy in the right direction when inflation is unacceptably low and unemployment too high." Reinhart supports last week's Fed action, but is not convinced that it will push mortgage rates much lower.
There are obvious dangers to such massive quantitative easing. The dollar could fall precipitously. Mortgage rates might not come down, and even if they do the housing recovery could remain stalled. But QE2 is the action Ben Bernanke spoke of back in 2002 when he made reference to Milton Friedman's assertion that to fight deflation the Fed could simply drop money out of helicopters.
The verdict on quantitative easing won't be known for some months. But despite numerous naysayers, the case can be made that Bernanke's massive monetary easing to pre-empt deflation will be judged as successful as Paul Volcker's drastic 1979 tightening was in combating inflation.