Fed, insecure about the housing market, keeps rates low through 2014

Preeti Upadhyaya/Creative Commons/MEDILL

What was going through Ben Bernanke’s mind when he and fellow Federal Open Market Committee members voted this week to keep the federal funds rate at virtually zero through at least 2014?  The housing market was a key factor. Despite signs of economy recovery, the Fed is skeptical there will be enough growth to give the moribund housing market the jolt it needs.

With mortgage rates at record lows and housing affordability at a record high, it would seem like the ideal time for a new homebuyer to jump into the market.  So why are we still seeing so many ‘for sale’ signs planted in lawns across America’s neighborhoods? Are buyers still waiting for the bottom to drop out of the faintly beating heart of the housing market?

Asha Bangalore, senior vice president and economist at Northern Trust, an investment management firm based in Chicago, explains that the issue of weak home sales is directly tied to the struggling job market.

“There are two reasons for the shortage of buyers – high unemployment and job uncertainty for people who have jobs.  Credit to purchase a home is not available easily,” she says.

She adds that foreclosures and underwater mortgages are two issues that must get addressed in order for the housing market to recover, but these are under the purview of Congress, not the Federal Reserve.

“Home sales and starts are close to recession lows,” says Bangalore, but existing home sales are up slightly.  The European debt crisis also contributes to how the U.S. economic recovery is forecasted, but what will happen across the Atlantic is anything but certain.

According to a statement released by the U.S. Census Bureau Thursday, seasonally adjusted new home sales in December were 307,000, down 2.2 percent from the month prior.  The National Association of Realtors announced last week that existing home sales rose 5 percent to a seasonally adjusted annual rate of 4.61 million homes in December 2011.

The bottom line is that the weak labor market does not support the recovery of the housing market.  Unemployment automatically rules out the prospect of buying a home, and even those with a job do not feel secure making a financial commitment like buying a new home when they are uncertain about their employment status in the future.

The Federal Reserve’s decision to keep interest rates at their super-low levels reflects its concern about the state of the economic recovery in general, especially the connected future of the housing and job markets.


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