Will Housing Make Bernanke Cranky?by
He's genial. Personable. Open. He's Ben S. Bernanke, who this Wednesday succeeded Alan Greenspan as chairman of the Federal Reserve Board.
But Bernanke might get a little cranky in the coming year if Goldman, Sachs & Co. is right about a coming slump in housing.
Read on ....
Goldman economist Jan Hatzius argues that softness in housing will be such a drag on the economy that the Federal Reserve, which has been steadily cranking short-term interest rates higher, is going to have to turn around and start cutting them to keep the economy from tanking. He's looking for a full percentage-point cut in 2007.
Here are Hatzius' bullet points:
**Houses are about 15% overvalued nationwide, ranging from 50% overvalued in Los Angeles to not overvalued at all in Houston.
**Housing construction, which is the highest share of GDP in half a century, will slow. And people will pull less cash out of their homes (through cash-out refinancings, etc.).
**Together, these drags will subtract 1.5 percentage points from the economy's underlying growth rate. For the past two years, housing's strength has lifted economic growth about 1 percentage point above its underlying rate. All told, then, the downturn in housing from will subtract 2.5 percentage points from GDP growth.
**Ben Bernanke probably isn't going to react right away. He'll wait until there's concrete evidence that a housing downturn is hurting the economy. "If and when that slowdown arrives, however, the response is likely to be fairly aggressive."