The general assumption regarding the current Fed policy is that the central bank’s intent on cooling the housing boom. Until and if the real estate market cries “uncle,” the central bank will continue raising interest rates. At least that’s the theory, and as theories go it’s as good as any, which is to say it’s in play until proven irrelevant.
As for facts, the housing market in particular has been on a tear in the 21st century, the fuel being the easy credit that became standard of recent years. Meanwhile, the Fed’s Alan Greenspan has been stung by criticism that the world’s most powerful central bank has been asleep at the switch while two of the greatest speculative booms in history have unfurled beneath its monetary nose.
The first, an extraordinary stock market run in the late-1990s, ended with a bursting of the bubble that for a time looked like it might drag the economy down with it. The Fed barely lifted a finger to slow the rise of excess in the latter half of the nineties, despite the maestro’s infamous recognition of the clear and present danger brewing a la his “irrational exuberance” speech of 1996.
Arguably, there is now another bubble in our presence, this time in residential real estate. But compared to its predecessor, the signs of irrational exuberance are fuzzier, the implications for the economy less distinct. History is clear on what the stock market crashes can do. The deflating of national housing bubbles isn’t nearly as common, nor as deeply studied.
That said, there are signs of late that the housing bubble, if in fact that’s what we’re in, is losing air. Whether the future will bring a slow leak or a crash remains to be seen. For the Fed’s part, it seems fixed on encouraging the former. Yet central banking is a blunt tool, as we’re so often told, and so the best laid plans may yet produce surprises.
In any case, it’s clear that the next five years aren’t likely to look like the past five years when it comes to housing trends. Yesterday’s report on December’s existing home sales is the latest bit of evidence suggesting that cooling is now the operative trend in residential real estate. Last month’s sales fell to the lowest rate since March 2004, dropping a sharp 5.7% in December from the previous month.
