Housing is a key factor for Fed but how is it going? - Rabobank

By FXstreet.com | July 02, 2014 AAA

FXStreet (Guatemala) - Analysts at Rabobank explained that, at first sight, the US housing market recovery looks fairly robust if we look at the sustained rise in house prices.

Key Quotes:

“However, the picture changes if we take a look at the financial incentives of the three main actors in the housing market: homebuilders, households and investors”.

“Both the widened profit margins and improved homebuilder confidence convey the impression that there’s still very much potential for continued expansion of supply in the housing market. However, a sustained recovery in volume and prices remains largely dependent on whether it will be possible to unlock latent demand”.

“While institutional investors are playing a catalyst role in the recovery, their incentives to remain active in the housing market are changing, especially if the Fed is going to embark on a hiking cycle. Meanwhile, although homes are still affordable, potential first time home buyers are held back by student debt and tight credit”.

“This could endanger a smooth transition from an investor-led housing market recovery to a household-driven growth path. We conclude that there is substantial downside risk to the housing market recovery. This has important implications for economic policy”.

“An interruption of the housing market recovery would increase the incentives for additional policy stimulus and intervention in the housing market by the government and regulators”.

“And if gridlock on Capitol Hill were to prevent an adequate fiscal policy response, the burden on the Fed to continue with extremely loose monetary policy would increase. After all, lower rates positively affect the activities of all three key actors in the housing market”.

“In particular, a prolonged period of extremely low rates would keep the opportunity costs of investors below the rental yield and provide an incentive to remain active in the housing market. Extremely low rates would also support economic activity and consequently employment growth”.

“A sustained labor market recovery is crucial in moving toward a housing market recovery led by household demand. Therefore, if we were to see a painful interruption in the housing market recovery, the Fed would most likely delay its hiking cycle, which should make the housing market transition less painful”.

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