A primary reason the stock market is bouncing all over the place (and lately swooning) is because analysts and traders hate uncertainty. Uncertainty about the future direction of the housing market is also why you've got some of the best-educated economists in the country at complete odds with each other (although I'd still suggest when reviewing anyone's 'predictions' to carefully measure whatever agenda may lie behind them, if any).
So why the uncertainty? Because this time things are a bit different. According to a story in the Boston Business Journal, Boston Fed President Eric Rosengren points out while previous downturns have accompanied interest rate hikes, this time it's the opposite:
"Previous periods where residential investment declined for a year or more were either accompanied by, or closely followed by, an economic downturn," Rosengren said in prepared remarks made available by the Boston Fed. "But history may or may not repeat itself because this period is distinctive in several other ways that add to uncertainty over its ultimate impact on the broader economy."
Among those differences, he said:
- Past declines in residential investment came amid rising interest rates. This time, they've been falling.
- Housing-price trends have become more national, rather than regional, as residential financing moves away from local banks. The result, he said, has been the loss of a "diversification benefit" investors enjoyed by holding national portfolios.
- The loss of the "diversification benefit" has prompted financial institutions to quicken the pace of foreclosures.
A key to preventing the expansion of a housing crisis will be "transparency," the prompt recognition of losses at financial institutions and mortgage lenders and steady monetary policy -- a key responsibility held by the Federal Reserve, he said.
I think he's got a very good point regarding this loss of diversification and its consequences.
Let's hope the banks and Mr. Bernanke also take notice.
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