I believe the FED has a decision to make now about housing. Either they start to buy MBS again, attempting to force mortgage rates down to new all time low levels–or–they simply let housing “go.” Let’s be honest. There is really very little the FED or Congress can do to alter the course of housing. Moreover, Chairman Bernanke in his dolorous news conference several weeks ago also stated rather lucidly that “the FED cannot create more oil.” That too is very much to the point. Oil’s historic repricing, which occurred seven years ago when the new regime above $40 started to unfold, cannot be undone. And trying to run a housing, commuting, and workplace system on 100 dollar oil that was originally built out on 15 dollar oil has run into predictable trouble.
As explained in a previous post, there is not going to be a return to “normal” oil prices and accordingly there will be no return to “normal” wages or “normal” house prices. Many real estate markets in the 1980-2005 period were characterized by their trophy pricing, or Giffen Good pricing if you will. More broadly, beyond a positional asset conferring status, nearly all American houses became call options on future wage growth. In this context the 30 year mortgage made exact sense as the owner, at around the half-way point of the loan’s term, would find his earning’s power reaching escape velocity. And voila! — the monthly mortgage payment would then drop down to a much smaller portion of one’s income allowing the owner to consume even more (and maybe even buy a second home). Such were the pleasures of a growing economy, running on cheap energy.
That era is now over.
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