I WOULD like the Fed to do more to secure the American recovery. I’m nervous about a few recent blips in the data, like today’s initial jobless claims number, which continued a jarring trend toward 400,000. If I’m less worried about the fragility of the American economy than I used to be however, housing has a lot to do with it. Consider just a few recent data points.
The apartment market strengthened for the fifth consecutive quarter during the first three months of 2012. March pending home sales beat expectations. Home prices rose from February to March, according to Zillow. Home prices rose in February, according to the FHFA. Delinquencies declined in March. New home inventory is at record low levels. From January to February, seasonally-adjusted home prices rose, according to Case-Shiller. The outlook for spring sales is promising. New home permits are rebounding. And there are lots of stories out there about low apartment vacancy rates and soaring rents.
My assumption has been that a real bottom in prices will greatly reduce the incidence of default and should accordingly lead banks to relax lending standards (which are currently at unreasonably tight levels). That, in turn, should flip the housing market equilibrium to one of price stability, construction, employment growth, and new household formation. This dynamic would of course be vulnerable to new financial jitters and extremely sensitive to interest rate changes. But I think it would provide a momentum to recovery that has been missing.
And should this dynamic kick in in earnest, I suspect we’ll find it pretty quickly whether the Fed is willing to tolerate inflation over 2% or not.