08/10/2013 10:08 am ET Updated Dec 06, 2017

QE3Important For Housing Recovery

Alas, it does look like the Fed's Governors are about to slow down the $85 Billion in monthly purchases of Treasury Bonds and Mortgage Backed Securities that have been holding down long term interest rates since last September. Even deficit 'dove' Chicago Fed President Charles Evens believes it can happen as early as September. And that is not a good thing for either real estate or economic growth in general.

First and second quarter GDP growth has been 1 percent and 1.7 percent so far this year, which is near recession levels. So contrary to what Chairman Bernanke has been saying, Evans and other Governors who are giving timelines seem to be saying the QE3 tapering could begin whether or whether not economic data continues to improve.

Evans says he expects growth in the second half of the year to accelerate to a 2.5 percent annual growth rate, from a 1 percent rate over the past three quarters, and reach over 3 percent growth rate in 2014, but how can that be with the draconian budget cuts that have reduced GDP growth by some 1.5 percent annually per the CBO and upcoming budget ceiling debate?

So what is wrong with at least some of the Fed Governors that they see growth where there isn't any? How in fact can they even predict the future, when Republicans are threatening to shut down the government again over raising the debt ceiling?

They must clearly believe in asset "bubbles", which have been proven only after the fact, as even former Fed Chairman Greenspan has admitted. Or, some Fed Governors have to believe stock and housing prices are rising too fast!

But that can't be the case, when we have not yet caught up to 4 years of weak household formation, as we said last week. Home prices have been held down from a combination of government austerity policies and private sector hoarding since the Great Recession that has kept most homebuyers on the sidelines until this year.

There has been a huge drop in household formation, so much so that the Cleveland Federal Reserve Bank says the growth rate in the number of households was cut by two-thirds between 2007 and 2010, compared to the previous 10 years.

"This slowing in household formation reflects the overall weak economy," says the Cleveland Fed, "but it has also negatively impacted the housing market, as lower household formation rates reduce housing demand."


Graph: WSJ Marketwatch

But the real culprit is income growth. The combination of Bush II tax cuts and 2 recessions resulting in the largest budget deficits since WWII have discouraged both private-sector and government investment. This has suppressed employment and so household income growth to the lowest level since WWII. So 2013 will not be the year of the housing recovery if the Fed continues allows long term interest rates to rise further. They have already risen one percent since April and Bernanke's first attempt to talk up interest rates. reports that asking home prices are already starting to lose steam in June as mortgage rates rise, inventory expands, and investor demand declines. Nationally, asking prices dropped 0.3 percent in July - the first month-over-month (M-o-M) decline since November 2012. Seasonally adjusted, prices rose 3.3 percent quarter-over quarter (Q-o-Q), down from a peak of 4.2 percent in April. Year-over-year (Y-o-Y), prices are up 11 percent nationally; however, this change is an average over the past 12 months and is therefore slower to show changes than monthly and quarterly numbers.

In 64 out of 100 U.S. metros, reports Trulia, the quarterly asking home price gain was lower than in the previous quarter. This slowdown was most apparent in the West Coast where prices have rebounded strongly already. Among housing markets where asking prices rose sharply Y-o-Y, price gains dipped the most Q-o-Q in Las Vegas, Oakland, and San Francisco.

So it really looks like the Fed deficit 'hawks' are controlling the Fed's agenda at present, with no proof of either a housing bubble, or that budget deficits are a danger. In fact, due to the already enacted budget cuts the deficit has been shrinking.

Harlan Green © 2013