Feb 11. Housing and QE intertwined
The housing/MBS collapse was the prime factor that reverberated through the economy and caused the financial crisis. Since that time, the gov’t backstops 85-90% of home finance. An administration report outlining ways for the gov’t to pare back its home finance involvement is supposed to be released today. At the same time, a prominent Chinese eonomist is recommending that China dump its GSE holdings ($500 bil) before QE2 ends in June. Even though the FASB relaxed mark-to-market rules it seems to me there still must be a lot of real estate related assets on bank books that will be further impaired if mortgage finance rates rise. And it doesn’t seem likely that the private sector would be willing to lend at the same rates currently available through the GSE’s. If the admin is truly serious about withdrawing support from housing, the Fed has no choice but to continue QE, which seems to artificially support both stocks and commodities (with attendant risks). If the Fed is serious about ending QE, then there is no way the admin can significantly pull back from housing support. I suppose it comes down to the sensitivity of housing to mortgage finance, and if there is continued home price erosion, what the impact will be on the economy in general. The WSJ has a piece today: Rise in Rates Is Headwind for Housing… and that’s just because 30 yr mortgage went over 5%. Like every other article it says rates are still historically low, but the article mentions nothing about credit availability. Though employment is slowly on the mend, it may be housing that again becomes a dominant issue going into the second half of the year.
