The Housing Market

 The Federal Reserve has officially ended its massive ($1.25 trillion) mortgage purchasing program. This, some say, will lead to another downturn in housing, which could drag the economy down all over again.

 There is an alternative view, however.  Although the Fed’s action will certainly not help the housing market, in my opinion, perhaps it will not result in a “double-dip” for housing or the economy.  Instead, home building, home sales, and home prices could all be up a year from now - not on every street or in every community, but for the nation as a whole.  Why is that?

 First, it’s important to recognize that while the Fed has stopped buying mortgage-backed securities, it is not planning on suddenly selling its holdings. Most likely, the Fed will hang onto the vast bulk of them for at least several years and allow the natural process of refinancing and principal repayment to gradually reduce the size of its portfolio.

 Second, mortgage rates probably will not suddenly spike as the Fed exits the market.

 Third, observers of the mortgage market know that the total amount of lending necessary to support the housing market in the next year is not particularly large by historical standards. Lower home prices, relatively low levels of sales, and the high loan-to-value ratios that prevailed during the bubble years mean that the capital needed to support housing in the next year is not that substantial.

 Fourth, housing prices have fallen below fair value.  Relative to rents, national average home prices are about 10% below fair value and have been the lowest, relative to replacement cost in more than thirty years.

 Fifth, the labor market – the last of the lagging economic indicators – has finally fallen into place as a positive for the economy. Civilian employment, a measure of jobs that includes the self-employed and start-up businesses, is up 1.36 million in the past three months, the most for any 3-month period since 1994.

 True, the housing market has taken it on the chin. And, true, the Fed is finally backing out of the market. But for the reasons listed above, the battered and bruised housing market could be in better shape one year from now than it is today.