This Monday we wrote about the housing recovery and noted near the end that the recovery is gathering steam even as government support for that sector has declined. Our point was that the free market has been a much more powerful force for recovery than all those government programs combined. Now that support from these programs is diminishing, guess what –the housing market is recovering.
Some readers may be wondering how we can say this considering the expansion of the Federal Reserve's balance sheet over the last few years. But the first round of quantitative easing started in October 2008 and the second round ended mid-2011. Throughout that time, housing did not get better. We are now in a third round of QE but that effort is so young it can't possibly be credited with rising home prices, sales, and construction over the past year. In other words, the timing of the housing recovery does not fit with the Fed's actions. Short-term interest rates hit "zero" in late 2008 and have been there ever since. Why did it take so long?
It is true that fixed rate 30-year mortgage rates have fallen to a new record low of about 3.5%. But they were 4.4% in Q4 2010 and 4.3% in Q3 2011 and we're hard pressed to believe the last 80 or 90 basis points made all the difference. Furthermore, adjustable rate mortgage rates have been low for a long time already.
If anything, the homebuyer tax credits of the past few years, by artificially moving up the timing of some home purchases, is holding back the recent increase in home sales. Also, construction activity could have started rebounding earlier if more of those not paying their mortgages were moved out of their homes more quickly. Many of these non-payers were able to pay – the "strategic defaulters" – and would have created some marginal extra demand for new rental units.
In other words, while the government has tried very hard to boost housing, the current rebound in the housing market is happening through organic means. It would have been even stronger if the government hadn't wasted resources the past few years trying to boost housing artificially.
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Posted on Wednesday, September 26, 2012 @ 11:28 AM
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