Will Housing Make Bernanke Cranky?

Peter Coy

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."

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE