Economic Review

8/10/2010

With housing activity at a standstill and a looming double dip, can a push down in long term rates fix the problem?

Earlier, we mentioned the possibility of another creation of a bubble to help offset/alleviate an impending double dip for the US economy. The biggest drivers of a double dip are the same factors that have been plaguing the economy for a couple of years now and they are lack of job creation, or should we say continued job cuts, and a pathetic state of affairs in the real estate market.

Housing activity in the US has suffered a serious set back from the glimmer of hope it staged in the 1^st quarter of 2010. Huge inventories and uncertainty on the job front have increased the supply of housing and decreased demand respectively. Thirty year fixed mortgages (those that should have been dominating the market over the past decade) come in at just about 4.50%. The issue now is…can the powers in place inflate the US Fixed Income market to push longer dated yields down to cause a rush of refinancings and potentially a jump start to the beleaguered housing market? The answer is a resounding yes that rates can be pushed down more.

But will 30 year fixed rates at perhaps 3.50% help the problem in the US Housing market? In the very short term it probably could prop up activity a bit, however given the lack of job creation and instability in the labor market (e.g. potential of more job cuts) very low mortgage rates will not solve the problem of large inventories and a double dip scenario. The real answer to the problem is job creation and with organizations continuing to outsource America, the future remains bleak.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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