Sunday, October 02, 2011

Housing is the main channel for monetary policy

"Falling home prices have not only impaired the capital of many financial institutions, but in a very real sense have disrupted the transmission of monetary policy"
says Eric Rosengren, Boston Fed president.

In normal economic times monetary policy is highly effective in reviving economic growth. When interest rates are lowered, consumers are given incentives to buy cars and homes. Demand for homes with 30 years mortgage are especially sensitive to interest rates. A pick up in home buying can create so many jobs that the economic recovery becomes self-sustaining.

This time is different. Banks are sitting on piles of foreclosed home or real estate owned(REO). Bank's lending standard for home buying has tightened significantly. The Fed's policy to set short term interest rate at zero did not stimulate home buying. New home sales fell to 295,000 SAAR and new home inventory to 162,000 record low since 1963.

1 comment:

55 said...

You should be an economist. ^_^