Investors face a nervous few months as they try to work out when US central bank boss Ben Bernanke will play his last remaining trump card — buying up long-term mortgage bonds in an effort to revive the ailing US housing market.
Certainly, there’s a strong case for Bernanke to act quickly, particularly after last week’s figures, which showed that US economic growth in the final three months of 2011 was disappointingly weak. As analysts were quick to point out, soaring inventory levels were responsible for more than 1.9 percentage points of the total 2.8% growth figure. When soaring inventories are stripped out, real final sales rose by a meagre 0.8%.
Analysts warn that US growth will likely weaken in coming months as businesses run down their inventories, and consumers are forced to cut back their spending. Last year, US consumers chose to dip into their savings in order to keep spending, but they are now running out of savings. And the strain on household finances looks set to worsen, as US state and local governments hike taxes and charges in an effort to bring their bulging deficits under control.
Bernanke knows that the US economic recovery is likely to remain feeble until the housing market shows signs of recovery. But there’s little sign of this happening, even though US mortgage rates are at record lows, and houses are at their most affordable levels in almost two decades.
But despite this dramatic improvement in affordability, the US housing market remains in the doldrums. Figures released last week showed that new home sales last year hit their lowest level on record. According to US Commerce Department data, just 302,000 new single-family homes were sold in 2011, the lowest number since 1963 when data were first collected.
The figures look even more depressing when they’re adjusted for US population levels. In 2011, there were about two-and-a-half new homes sold for every 1000 households, a sharp slide from the peak of the housing boom in 2005, when more than 11 new homes were sold for every 1000 households.
The steady slide in US house prices is having a depressing effect on consumer confidence as households watch the value of their largest asset — the family home — being whittled away. According to figures released last week, the median price of a new house in the US dropped by 12.8% to $210,300 in the 12 months to December 2011.
Some analysts are tipping that US house prices still have a further 10-15% to fall because the rising number of foreclosures will mean that there are even more distressed home sales flooding the market. At the same time, home buyers are finding it difficult to take advantage of cheaper house prices because banks are applying extremely tough lending standards.
But the last thing that Bernanke wants to see is a further decline in the US housing market. Last week, he flagged the possibility of another round of quantitative easing — and this time, he’s likely to specifically target the housing market.
A QE3 that sees the US central bank buying up long-term mortgage-backed securities could provide a handy boost for the US housing market. It would provide a much-needed boost for liquidity in the housing market, and encourage banks to start lending for housing again. By making it easier for borrowers to get cheap housing loans, Bernanke may be able to prevent further falls in housing prices and even encourage a modest rebound.
If housing prices were to start to recover, consumer confidence would also rebound. If there were more new houses being built, there would be more jobs in the construction sector. And rises in house sales would also flow through into higher demand for furniture, carpets and white goods.
Bernanke is well aware that the current situation of plunging housing prices and shell-shocked consumers is eerily reminiscent of the 1930s Depression, and he’s desperately keen to avoid a replay of those desperate times. As a result, he’s likely to use his last trump card to try to rescue the US housing market.
*This article first appeared on Business Spectator
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