I think many of us are confused about where the national economy is going at the moment and with that, where housing is going.

The Fed seems to be having trouble delivering a clear message. On one hand, we have been given the impression that inflation is a concern and that housing is not too bad. That makes us worry about rising mortgage rates. Yet on the other hand we are seeing national economic stats slip, suggesting the economy is weakening. Add to that, the troubles with subprime mortgages and tightening credit (and increased awareness of risk by investors).

The FOMC recently changed their bias of action against inflation to neutral in their latest meeting suggesting growing weakness in the economy and raising the odds of a rate reduction in the second half of this year.

Greg Ip, who covers the Federal Reserve for the Wall Street Journal, touched on this market confusion in today’s article Fed Has Trouble
Getting Across Nuanced Message

>Since then, economic developments have added to the impetus for change. Fed officials had expected that as the housing market slumped, stronger business investment would pick up much of the slack. But business investment has been surprisingly weak; capital-goods shipments excluding aircraft and defense products have fallen in four of the five months through January. February data will be released tomorrow.

>While officials still believe demand for housing has stabilized, they acknowledge the recent turmoil in the subprime-mortgage market adds an unpredictable element to the outlook for the housing sector.

>These factors, however, haven’t led the Fed to significantly lower its growth forecast. In late February Mr. Bernanke told Congress, “There is really no material change in our expectations.”

>Yesterday, Federal Reserve Bank of Chicago President Michael Moskow told an audience in Beijing that “we are expecting the recent softness [in capital spending] to be temporary,” though “we are monitoring developments in investment closely.”

I am not sure how the deterioration in the subprime market situation, which wasn’t as apparent a little over a month ago, won’t change economic expectations. It will likely cause credit to tighten on Alt-A and prime mortgages, tempering demand, when the market is already vulnerable. The national housing market simply hasn’t had a chance to influence the national economy at full force because the underlying factors such as employment seem to be pretty good.

What does this mean to housing? [Translated] Well, things are pretty good, in not such a bad way yet we must be concerned and need to deal with it carefully and look at the indicators to make sure we are moving along in the right direction in case something thats not so pleasant actually happens that we haven’t prepared for in a careful thoughtful manner. Got it?


One Comment

  1. Grunt March 27, 2007 at 1:36 pm

    My heart swells with comfort.

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