The Fed Is Worried About Housing - Should You Be?

In comments to Congress in May, Federal Reserve Chair Janet Yellen expressed concern that the slowing momentum of the housing market could be a sign of trouble for the economy.

A year ago, the housing market was one of the bright spots for the economy. Now, according to the nation's top influence on monetary policy, it has become a problem child. How serious are Yellen's concerns, and how could they affect consumer plans to buy or sell a home, take out a home equity loan, or refinance a mortgage?

How Serious Are the Concerns?

In her testimony before Congress, Yellen expressed concern that "the recent flattening in housing activity could prove more protracted than currently expected."

Weakness in housing could be both a symptom of a weak economy and a contributing factor to further weakness. The context of Yellen's comments is that the economy seems to have suffered a relapse over the past several months. After peaking at 4.1 percent in the third quarter of last year, real GDP growth slowed to an annual rate of just 0.1 percent in the first quarter of this year, according to a preliminary estimate from the Bureau of Economic Analysis. (Update: worse yet, that figure was revised to indicate a .1 percent DROP in GDP on May 29th).

Housing seems to fit into this pattern of slowing momentum. According to the Mortgage Bankers Association, at the end of the first quarter, new purchase mortgage applications were running 16 percent behind the previous year's pace. For the six months ending in February of this year, the S&P/Case-Shiller 20-City Composite Home Price Index had risen by just 0.5 percent; over the previous six months, it had risen by 12.3 percent.

On the other hand, it is too soon to declare this a real slump. Despite slowing recently, housing prices are still up by nearly 12.9 percent over the past year. As for the broader economy, the Bureau of Labor Statistics reports that employment growth has been quite strong over the past three months. Creating jobs puts more money into the economy, and ultimately creates more demand for housing.

Why You Should Be Concerned

So what is a consumer to make of all this? After all, there are some things to like about this environment, and some reasons to be worried. Here are three things to be concerned about.

  1. A slump could diminish home equity. Home owners in many parts of the country have seen the values of their homes claw their way back from the depths of the housing slump. It would be agonizing to see those values start to slide just as people are poised to benefit from rising prices by qualifying for home equity loans again.
  2. Falling prices could jeopardize refinancing - just as mortgages get cheaper. According to Freddie Mac, 30-year fixed mortgage rates hit a six-month low in mid-May. For home owners previously prevented from refinancing because their loans were under water, the return of low mortgage rates coupled with improving home prices could finally give them a shot at refinancing. It would be a shame if falling home prices took that chance away before they could benefit from low mortgage rates.
  3. Buying into instability is scary. Suppose you do not yet own a home, but are thinking of buying one. In some ways, you could benefit from softness in home prices, but if the market starts tanking again, buying will become a scarier proposition. Nobody wants to buy an asset that is rapidly depreciating.

Why You Should Be Hopeful

On the other hand, it is not all gloom and doom. Consumers have some legitimate reasons to be hopeful:

  1. Too much recovery could lead to speculative prices. Currently, home prices have recovered some, but not all, of what they lost when the housing bubble burst. What you have to ask yourself, though, is whether you really want prices back to where they were at the peak of that bubble, perhaps setting up another traumatic crash.
  2. A leveling off of price gains could mean stability at last. The recent trajectory in home prices is more level than downward. Over the past decade, consumers have been put through dramatic rises and stunning crashes in home prices. A more level course might make the market easier to deal with for all concerned.
  3. The Fed's concern could translate to lower mortgage rates. The Fed continues to taper back on the program which helped bring mortgage rates down to record lows. If housing weakens enough, it could be tempted to ramp its low mortgage rate policies back up. This would certainly benefit buyers, and could also benefit home owners with a  sufficient cushion of equity who wanted to refinance a mortgage or get a home equity loan.

In a sense, the Fed is paid to worry, so consumers should not be too concerned about Yellen's recent comments about housing. However, all of this does demonstrate just how volatile the housing market can be. Buying real estate with the intention of securing affordable housing can help stabilize your finances; buying to speculate can effectively tie those finances to the housing market's roller coaster.


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