Bernanke & the Bubble

Everyone wants to know how new Fed Chief Bernanke will handle what his predecessor coined as the "housing bubble". Here’s one take:

Centre Daily Times | 04/24/2006 | Goldilocks economy yields to Jekyll-Hyde.

Another quarter-point rate hike at the Fed’s June 28-29 meeting would push short-term rates to 5.25 percent, influencing bank loan rates for consumers and businesses.

That would complicate the housing outlook further.

The hot housing market and cheap lending rates helped fuel much of the current economic expansion. National Realtors Association data show median home prices grew 53.2 percent between 2000 and 2005.

Many economists think that steep rise reflected a speculative bubble fit to burst in the hottest markets on both coasts.

Just about every indicator now suggests a slowing housing market, especially in California and Florida. New housing starts nationwide fell 7.8 percent in March, and prices appear flat for existing homes, which are also lingering longer on the market.

"The anticipated degree of decline in starts for 2006 (6 percent to 7 percent) still qualifies as a ‘soft landing’ for the housing market, following unsustainable exuberance in 2005," David Seiders, chief economist for the National Association of Home Builders, wrote in his April 19 column.

"We expect much of the decline to reflect withdrawal of investors/speculators from housing markets" as double-digit gains in home prices become less likely.

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