I hope to have more on Bernanke’s press conference when the transcript is posted, but this partial comment in response to a question goes a long way toward understanding the moribund housing market:

Unfortunately, there are problems, including the fact that credit standards for mortgages have tightened considerably so that roughly about the bottom third of people who might have qualified for a prime mortgage in terms of FICO scores a few years ago cannot qualify today.  That’s an important problem.

We all well know the subprime market is dead.  I had not realized that fully 1/3 of potential prime borrowers are now no longer considered qualified by virtue of higher FICO scores being required by banks.  Simply put, we’ve apparently got big issues on both sides of the equation (way too much supply, and a demand problem that is being exacerbated by banks’ newfound religion on credit standards).  Exactly how is the tremendous slack supposed to be picked up?

I’ll also opine for a moment on the Fed’s statement, and leave the follow-up for when a transcript of the Q&A is posted.  Two words (highlighted) in this line caught my attention, and also that of today’s second questioner, whomever that was:

The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. 

The statement begs the question as to how much the Fed believes is temporary and how much it believes will linger for a while or is perhaps permanent.  As mentioned, a questioner pressed on this a bit, and I’ll review the transcript when available.  But this, to me, is worrisome (along with the fact that, at least for now, the Fed is washing its hands of further proactivity).

Category: Economy, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

26 Responses to “One Reason for Housing Doldrums”

  1. MayorQuimby says:

    How much more proactive do you want the Fed to be? There won’t BE a dollar if they keep the games up!

    It’s amazing really.

    1. The structural issues in the economy are starting to ‘bleed through the rug’. Eff the Fed – worry about the REAL economy.

    2. Printing money never solves anything and never did.

    3. Printing money and handing it to rich people has failed and will fail even further should QE 3 come out.

    The economy has to produce its own money off of labor. Any attempts to print money to offset a weakening real economy simply transfers purchasing power away from the very people upon which capital is formed.

    Short version: The best thing we can do is to embrace lower prices, allow defaults to happen, break up TBTF and essentially reset the economy. The current system is unsustainable.

    QE 3 will just push the $DXY down the tubes and push oil, food and gas prices up. This will only shred housing further.

  2. Unsympathetic says:


    Bernanke’s comment re “potential prime borrowers” is mendacious at best.

    As to the ins-and-outs of how/why this happened, I recommend Tanta.

    In short: A borrower who was subprime in 02 was prime in 05. So I’d need to see proof that somehow a return to anything resembling “normal” lending (20% down, etc etc) is a cause for concern. If that 1/3 which Bernanke refers to represents the subprime guy who was prime from 05-08, then this statement by Bernanke represents a POSITIVE force for stabilization of the market.

    “Exactly how is the tremendous slack supposed to be picked up?”

    What are you talking about? This is the definition of price discovery. The slack is supposed to be picked up by sellers of houses dropping those prices 30% at least.

    Housing will stay dead until sellers of houses accept reality. This includes bank REO’s.

  3. James says:

    > The statement begs the question as to how much the Fed believes is temporary and how much it believes will linger for a while or is perhaps permanent.

    I very much doubt they would hazard an answer with much certainty, and if they did . . . I very much doubt many would believe them.

  4. Adyt says:

    I think I remember Ben Bernanke answering that the other part represents the headwinds due to fact that we come after a financial crisis.

  5. BennyProfane says:

    As James Grant said yesterday, the housing market will be “normal” again when sellers and buyers agree on price. No sooner.

    Too bad Bernanke is reverting to the old “subprime caused all this” argument. This coming from the same person who didn’t recognize the bubble as it existed and refused to accept the fact that it had popped and would bring the world down with it until UE hit 10%. Man, this guy is out of touch. Or just a really bad liar.

  6. Joe Friday says:

    “I had not realized that fully 1/3 of potential prime borrowers are now no longer considered qualified by virtue of higher FICO scores being required by banks.”

    And apparently, the new rules that will take effect in about a year would make about THREE OUT OF FIVE current mortgage-holders INELIGIBLE for a mortgage.

    Once again the meme that this was all about people who shouldn’t have mortgages getting mortgages instead of the massive unregulated predatory lending that occurred has prevailed.

  7. Dr. Goose says:

    A Deadbeat’s Confession

    “When my debt service proved but a fiction,
    The bank didn’t press for eviction,
    As experience showed
    That an empty abode
    Would only invite dereliction.”

    Limericks Économiques

  8. jonpublic says:

    I had no problem getting a loan to purchase a home with my credit in the mid 600s recently.

    Until there is some job market stability, I don’t see folks going out to purchase homes.

  9. wally says:

    The ‘credit standards’ excused is just an empty excuse.
    Would you loan money to somebody to buy an asset that is declining in price? And who has a concern about being laid off? And who realistically sees no income increase for years… if ever?

  10. tude says:

    The market is still completely out of whack, at least around here. We have been shopping for a home in the East Bay (east of SF in neighborhoods that only 10 years ago no one wanted to buy in and you could easily find a nice home for 200k or less). We are pre-approved and have put offers in on houses that were very strong (20% down) only to be out-bid by people paying well over asking with all cash. Every house nearing affordability (but still well above 1998-2000 prices) is being bought with cash by investors who either develop the property if it is a large lot, or turn the house into a rental. My current neighborhood was a nice, working class neighborhood with almost no rentals, a place where working class people could buy small first homes in a safe, friendly neighborhood. Everything that comes on the market now is bid on by plenty of families and first time buyers probably thrilled they can finally buy an affordable house, and all have been sold to cash investors and turned into rentals – It is beginning to ruin the neighborhood.

    I’m saddened and disgusted by everything that has happened to society over the last 10 years.

    Yes, home prices are still too high and people are not approved to buy them at these inflated prices, but there is also another problem, everything that IS affordable is swiped by “investors”. It’s lose-lose for average people.

  11. wngoju says:

    I semi-agree with @wally above.

    I think a main reason is that There Is No Private Lending Market. Some links here: http://goo.gl/8Npo3. (Please excuse ref to my own blog)

  12. “…We all well know the subprime market is dead…”

    w/that, We may do well to wonder..see some of…


  13. Petey Wheatstraw says:

    Here comes the big squeeze. Now that the corporatist class is fully stocked with cash (not just the corporate “persons” themselves, but those who use them as a pass-through to laundered personal wealth), and the middle class (and I mean pretty much the entire middle class) is still largely indebted, Bernanke will drive up the value of dollars.

    Seems like the perfect set of conditions to force a two class system.

    Look out below, indeed.

  14. Petey Wheatstraw says:


    a two-class Corporatist system.

  15. Petey,

    the 1-9-90 socio-economic ‘split’, seems to be the Goal of the gambit..

    http://www.thefreedictionary.com/gambit see #2

  16. Petey Wheatstraw says:


    No doubt. They’ll needs them some Bureaucrats.

  17. Transor Z says:

    One thing you can do is provide tax and other incentives to landlords to try and smooth the transition from an ownership society into greater % renters. Encourage people to buy and let property that might otherwise turn into blight. A really ambitious plan would involve comprehensive federal legislation that would preempt local zoning limits on single families in R1 zones being rented.

  18. tjgpdx says:

    the housing market will stabilze in about 12 months or so when the banks have no more reserves to recapture in order to amp up earnings against which they pay bonuses. Why all the sturm and drang about imposing greater reserves requirements on the banks? They certainly aren’t lending.

    Trading profits are off or non existant, swipe fees are substantially reduced and Fed rates will be unchanged for another year.

    Something’s gotta give. My bet the bonus shrinkage will exact too much pain. We might even see new leadership at B of A and JPM.

  19. Petey Wheatstraw says:

    Wait ’til they do away with the mortgage interest deduction.

  20. Irwin Fletcher says:

    “exacerbated by banks newfound religion on credit standards”

    Do the banks set the guidelines or is it Fannie and Freddie?
    Don’t banks’ mortgage companies send the loan into Fannie and Freddie’s automated loan underwriting for approval or denial?

    If so, why are you blaming this on the banks?
    Who owns F&F? Who tightened the credit standards?

    @Unsympathetic: I think you may have it right.

  21. lobsterfest says:

    Long time, first time.

    Let’s get real here. I’m 28 and make half of what I did when I was 23. My girlfriend makes half of what I make. We live spartan life styles and we get by, but we can’t save.

    I can’t save to put a down payment on a house. And there are millions and millions and millions just like me. And I’m one of the lucky ones with a job and health insurance.

    For all this intense focus on the housing market (housing starts, TARP/HOPE, etc.) it boils down to this: people need money to buy a house. No one has money but the top 2% of income earners.

  22. rktbrkr says:

    Does anybody know if banks offer financing breaks with their REOs? For example Joe Sixpack makes an offer to buy a CITI REO but he doesn’t have 20% down or his FICO is lower than banks expect now. Joe offers 150K but needs financing and Jose the speculator from Rio offers 120K all Reals, are the banks so scared of the mess they’ve made that they’d take Jose’s lower offer?

  23. rktbrkr says:

    So now the impact of higher fuel costs on the weak recovery are only partly transitory? Coordinated dump of world’s oil reserves is intended to “punish” the speculators who have gotten fat off QEx, hopefully without punishing other longs who need to supply the “wealth effect” in lieu of stuff like jobs

  24. lobsterfest,

    see some of this.. http://finance.yahoo.com/blogs/daily-ticker/retirement-know-dead-europacific-pento-175638657.html;_ylt=Amc4Mgx1FpCtovE3.r136Iatcq9_;_ylu=X3oDMTFoMzZzOGZhBHBvcwMyBHNlYwNjb250ZXh0dWFsLWRhaWx5dGlja2VyBHNsawNyZXRpcmVtZW50YXM-

    “An increasing number of Americans are worried about their retirement. In fact, a recent Gallup poll finds retirement is the top financial worry in this country. The poll found that 58% of adults are “very/moderately worried” about maintaining their current lifestyle after they stop working. The number jumps to 77% among 30 to 49-year-olds.

    There’s good reason to worry, says Michael Pento, senior economist at EuroPacific Capital. “Retirement is on life support, if not indeed dead as we know it today,” he tells Aaron Task in the accompanying interview.

    “Where is the income going to come from to sustain a viable retirement?” Pento asks. The problem, as he sees it, is simple — income and asset values have plateaued over the last decade, while pension and entitlement programs are underfunded.

    Pento recently penned a piece called “The Extinction of Retirement,” detailing the financial problems facing Americans on a fixed income….”

    Pento’s ‘thesis’ is correct, as things, now, stand.

    make sure to pass it along to your friends..LSS: it’s up to us to change the, current, Scene

  25. Jolly Rancher says:

    The housing market is taking a long time to recover because…..

    1) People are retiring in greater numbers. Many are selling their homes.
    2) People are entering the workforce but either don’t find a job or settle for lower paying jobs.
    3) Credit standards were lifted after 2008.
    4) Many mortgages are under water making refi nearly impossible. How do you refi a $200,000 mortgage if the house is worth only $160,000? That makes the sale difficult also.

  26. socaljoe says:

    I thought home affordability is a good thing.

    Why would we want to manipulate the markets with stimulus, bailout, tax incentives, and depressed mortgage rates to artificially raise house prices?

    To bail out overleveraged borrowers at the expense of prudent home buyers?

    How can this be good policy?