Wednesday, May 7, 2014

The Fed's contribution to the stalled housing boom

The Fed’s senior loan officer survey released Monday showed that banks are not making it easier for potential homebuyers. The survey of 74 domestic and 23 foreign banks operating in the US shows that banks are holding loan standards steady for prime mortgages and have raised them for nontraditional and subprime loans over the past three months. 

Fed officials have frequently stated that their ultra-easy monetary policy is aimed at keeping mortgage rates low to revive home sales. Their tapering talk last spring caused the 30-year mortgage rate to jump by about 100bps. It is still 82bps above the May 2, 2013 low. Meanwhile, the Fed is subjecting the banks to regular stress tests, which discourages them from making risky loans to would-be homeowners. 

In other words, the Fed is tapping on the mortgage-lending brakes and the monetary accelerator at the same time. This hasn’t stopped banks from making lots of business loans secured by inventories and other working capital.

[Dr. Ed Yardeni, May 7,