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The recovering housing market may be heading for a relapse as President Barack Obama and Federal Reserve Chairman Ben Bernanke consider ending support for the source of the global financial crisis.
The Obama administration is studying whether to let a first-time home buyers' tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, Chief Economist at Deutsche Bank Securities.
The two programmes have helped stabilise real-estate demand, with new-house sales rising 9.6 per cent in July from the prior month, the most since 2005.
Ending these efforts may stifle the housing rebound by depressing sales and pushing up both mortgage-backed bond yields and interest rates on home loans, even in the face of the record-low zero to 0.25 per cent short-term rates the Fed has engineered, said economist Thomas Lawler.
A weaker housing market would likely dampen the economic recovery and undercut shares of builders including Fort Worth, Texas-based DR Horton Inc and Miami-based Lennar Corp, that have risen 40 per cent this year, based on the Standard and Poor's Supercomposite Homebuilding Index of 12 companies.
"Things could get ugly," said Lawler, an independent consultant in Leesburg, Virginia, who spent 22 years at Fannie Mae, a Washington, DC-based government-controlled mortgage-finance company. "We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying programme and rising foreclosures."
This is the first major test of policymakers' ability to coordinate exit strategies as they seek to wean the economy off government support, said Brian Bethune, Chief Financial Economist of IHS Global Insight, a forecasting company in Lexington, Massachusetts. They have already acted separately, with the administration ending its $3 billion (Dh11 billion) "cash-for-clunkers" automobile trade-in programme on August 24 and the Fed starting to wind down its purchases of Treasury debt, which totalled $285.2 billion between March 25, when the initiative began, and September 16.
Bernanke and his colleagues, who meet today and on Wednesday to map monetary strategy, discussed "tapering" off the Fed's purchases of mortgage-backed securities and housing-agency debt at their last gathering in August, according to the minutes of that meeting. No decision was made by the central bank's policy-making Federal Open Market Committee.
Under the current programme, the Fed is scheduled to buy up to $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of the year. So far, it has purchased $862 billion of the former and $125 billion of the latter.
A trio of Fed presidents - Jeffrey Lacker of Richmond, James Bullard of St. Louis and Dennis Lockhart of Atlanta - has publicly raised the possibility the central bank might not spend all the money authorised for the mortgage-backed securities. Lacker questioned whether the economy needs the additional stimulus in an August 27 speech.
New York Fed President William Dudley, who is vice chairman of the FOMC, has sounded more cautious.
"The market expects us to complete these programmes," he said. "To contradict that market expectation is a pretty high hurdle."
An abrupt stop might push up mortgage rates by a half to one percentage point, said Hooper, a former Fed official. Tapering off - by reducing weekly purchases and stretching them beyond the end of the year - would have a more muted effect, pushing rates up by at least a quarter percentage point, he said.
Via Gulf News
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