Tags: housing | market | rates | Fed

America May Face a New Housing Problem

Thursday, 10 Oct 2013 01:55 PM

By Michelle Smith

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Trouble could be brewing in the housing market, as interest rates rise and the Federal Reserve considers tapering its asset purchases, warns CNBC.

Housing is viewed as a bright spot in the economy. The Fed is using its muscle to suppress interest rates and home prices are rising. The latest Case-Shiller Index shows significant improvement, up 12 percent over past year. But CNBC says digging deeper into the data reveals the devil in the details — the housing market is not as healthy as it may appear.

Many buyers are price sensitive. On one hand there are those taking advantage of the sale. They are upgrading, buying a second home or they are private equity firms and hedge funds snapping up cheap investment properties. Another major buying group is the average American who is refinancing in efforts to clean up their balance sheets, CNBC notes.

Editor’s Note:
New Video: Obama Plans to Redistribute Seniors’ Wealth

With interest rates already on the rise, the Fed's desire to taper is a major concern. Last month, mortgages rates reached a two-year high, Bloomberg reports.

The surge is rapidly chilling demand for refinancing, with JPMorgan Chase projecting that refinancing volumes could drop 40 percent in the second half of 2013.

Eager, new homeowners, for the most part, have never shown up the housing party, and higher costs aren't likely to be a convincing invitation.

Meanwhile in addition to the Fed eyeing the exit, President Obama also wants to wind down the government-run mortgage finance companies, Fannie Mae and Freddie Mac. But, according to CNBC, these entities, along with government agencies, guarantee 90 percent of all mortgages.

Banks claim they can't readily jump back into the housing market. Interest rates need to go higher, they say, because at this level, 30-year fixed rate mortgages still are not profitable.

While many believe employment is the primary factor in the Fed's tapering decision, CNBC says the central bankers are agonizing over housing data and higher interest rates.

But some feel confident that the Fed is aware of how fragile the situation is and will avoid making detrimental decisions about its purchases of mortgage-backed securities (MBSs).

The $40 billion per month the Fed spends on MBS is widely considered more beneficial to the economy than the $45 billion a month spent on bonds. Considering that, and the potential danger of the Fed pulling out of the housing market, leads some to believe that tapering will be limited to Treasurys.

John Silvia, chief economist at Wells Fargo, is of like mind, telling Bloomberg he believes, "the Fed will want to stay away from the MBS and say, 'Let's just taper the Treasuries.'"

Yale economist Robert Shiller writes in The New York Times, "Though we are not in a bubble now, there are troubling signs that we may be heading toward one.

"I see no signs that homebuyers have learned the lesson . . . that existing home prices have shown virtually no tendency to trend upward in real, inflation-corrected terms over the last century," Shiller explains.

Editor’s Note: New Video: Obama Plans to Redistribute Seniors’ Wealth

Relates Stories:

Shiller Worried About Housing Bubble

CNBC: We're in Another Housing Bubble

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