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EJ
01-18-07, 12:43 AM
The Role of House Prices in Formulating Monetary Policy (http://www.federalreserve.gov/boarddocs/speeches/2007/20070117/default.htm)
January 17, 2007 (Fed Governor Frederic S. Mishkin)

At the Forecasters Club of New York, New York, New York

Over the past ten years, we have seen extraordinary run-ups in house prices. From 1996 to the present, nominal house prices in the United States have doubled, rising at a 7-1/4 percent annual rate.1 Over the past five years, the rise even accelerated to an annual average increase of 8-3/4 percent. This phenomenon has not been restricted to the United States but has occurred around the world. For example, Australia, Denmark, France, Ireland, New Zealand, Spain, Sweden, and the United Kingdom have had even higher rates of house price appreciation in recent years.



Large run-ups in prices of assets such as houses present serious challenges to central bankers. I have argued that central banks should not give a special role to house prices in the conduct of monetary policy but should respond to them only to the extent that they have foreseeable effects on inflation and employment. Nevertheless, central banks can take measures to prepare for possible sharp reversals in the prices of homes or other assets to ensure that they will not do serious harm to the economy.

[B]AntiSpin: Since 1955, a crashing housing market attended by a greater than 30% decrease in housing permits issued over 15 months leads to recession and unemployment as surely as darkness arrives in the evening in Boston by 6PM in winter. So we can read this as an announcement that the Fed is warming up the printing presses for a big run in the not too distant future. No better way to counter the potential for "serious harm to economy" than create yet another new asset bubble to cover the damage from the collapse of the last one–tech stocks, to housing, to... what?

The trick is to allow the Monthly Payment Consumer to convert illiquid assets into liquid assets. Houses into cash-out refinancings, for example. Now that most of the inflated price "equity" has been extracted from US homes–ok, not only the US but homes in all nations with central banks that played the same game of low interest rates and tax incentives (includes the UK and Ireland, excludes Germany)–what illiquid assets from savings of old are left for Americans to turn into ready cash? Sharp eyed iTulip forum member Christoph von Gamm wryly suggests 401(k) and IRA accounts are a potential next target.

If we see rule changes to allow these accounts to be turned into cash without tax or early withdrawl penalties, what are we supposed to think about our government's dedication to building an American middle class with sound retirement savings?

As for the housing bubbles in Australia, Denmark, France, Ireland, New Zealand, Spain, Sweden, and the United Kingdom which were, in this Fed governor's opinion, worse than the US bubble, while no housing bubbles appeared in Germany, Italy, and other European nations, perhaps the fact of euro zone one-size-fits-all interest rates had something to do with it?

Uncle Jack
01-18-07, 06:54 AM
I don't think you have to wait for tax breaks (non-penalties) for the consumer to tap into their retirement accounts. From my weekly update just this past Saturday:

"Twice this week and three times in the previous week (granted, thatís a small sample size) people have asked me about borrowing from their 401(k) accounts and IRAs to meet certain cash needs. Iím a lone financial planner working in a large state, and my client base is small compared to the big firms, but I know those five accounts will eventually be tapped into because there is no fighting the consumer."

When the assets inside those retirement accounts appreciate (have appreciated), the strapped consumer sees nothing wrong with taking a 10% penalty and recognizing the withdrawal as ordinary income to make ends meet. It's already happening.

art
01-18-07, 08:51 AM
I want to be able to borrow against my social security :-)

jk
01-18-07, 10:09 AM
baby boomers started turning 60 last year. you can make ira [and i think 401k] withdrawals without penalty at 59 1/2.

Pervilis Spurius
01-18-07, 11:52 AM
Perhaps the gov't could change the rules to allow margin loans (aka 401k/ira equity loans)

Spartacus
01-18-07, 06:13 PM
something similar actually was done in Canada in the last real recession, ca. 1990 ... people were allowed to take money out of their RRSP (private tax-privileged retirement savings, unrelated to employer) just for the purpose of buying houses.

But the money had to eventually paid back in, else there were tax penalties.

So not against the goverment retirement "savings" but your own retirement savings.


I want to be able to borrow against my social security :-)

DemonD
01-19-07, 02:32 AM
You can take certain money from Roth IRA's penalty free. I think you can take as much out as you put in. So let's say you put 10k, and your IRA is worth 15k having done well with investments, you are allowed to take 10k out penalty free (I think there are some restrictions on what exactly, like a first home or something).

In regards to this thread, I wouldn't be surprised if the rules become a bit more lax, especially with baby boomers sitting on nest eggs and maybe not quite hitting 59.5 yet. But jk's point is the best one... boomers are now turning 60, and will probably start drawing from their retirement accounts. And, I mean, c'mon, they can buy 40" plasmas for a thousand bucks, they've worked hard for it, why not eh?

spunky
01-19-07, 05:11 AM
You can take certain money from Roth IRA's penalty free. I think you can take as much out as you put in. So let's say you put 10k, and your IRA is worth 15k having done well with investments, you are allowed to take 10k out penalty free (I think there are some restrictions on what exactly, like a first home or something).

In regards to this thread, I wouldn't be surprised if the rules become a bit more lax, especially with baby boomers sitting on nest eggs and maybe not quite hitting 59.5 yet. But jk's point is the best one... boomers are now turning 60, and will probably start drawing from their retirement accounts. And, I mean, c'mon, they can buy 40" plasmas for a thousand bucks, they've worked hard for it, why not eh?

Unless your are like my parents. Pop lost his ass ( 1/2 retirement ) in the crash of 00' ( Conseco ) and my mom is still going to college at 62 yr old , and got a new job at the local bank, cause she needs the money and benefits and bought more house than she could afford. How sad, espicially when pop was saving at a near 50% clip for decades:(

Uncle Jack
01-19-07, 07:04 AM
Quoting the rules of the accounts, i.e. - no penalty on Traditional IRAs and 401(k)s if withdrawing after 59-1/2, or no tax-free withdrawals on contributions to ROTH accounts, MISSES the point!

You shouldn't be taking that money out until it is to be used as an income stream in retirement. If that money starts flowing out now due to baby boomers hitting the magical finish line or people using those funds as a source of emergency cash just means less money going into the market.

If retirement accounts are the last source of turning an illiquid asset into cash, how will the market support higher stock prices?

jk
01-19-07, 10:17 AM
You shouldn't be taking that money out until it is to be used as an income stream in retirement. If that money starts flowing out now due to baby boomers hitting the magical finish line or people using those funds as a source of emergency cash just means less money going into the market.

If retirement accounts are the last source of turning an illiquid asset into cash, how will the market support higher stock prices?


money flowing out of ira and 401k accounts will be a net drain on the markets whether the money is going for rocking chairs or roller coasters. but hard times usually turns people into savers, and many commentators, of whom gary shilling was among the earliest, have been predicting a return to savings. so presumably you have some folks drawing down savings and others adding to savings. i can imagine the drawdown being more prominant early, as the squeeze begins. further into the process perhaps there are net savings again.

Uncle Jack
01-19-07, 12:11 PM
"i can imagine the drawdown being more prominant early, as the squeeze begins. further into the process perhaps there are net savings again."

So you can be bearish now and bullish later, after the increased savings overtakes the drawdown from present levels, of savings I mean.

jk
01-19-07, 12:51 PM
"i can imagine the drawdown being more prominant early, as the squeeze begins. further into the process perhaps there are net savings again."

So you can be bearish now and bullish later, after the increased savings overtakes the drawdown from present levels, of savings I mean.

another way of saying this is that it's easier to be bullish at lower prices.

ratfink
01-19-07, 11:29 PM
Well, loans from your 401k and liquidation of Social Security benefits may be all well and good, but how about this as the next home for bubba:

http://www.globalpawn.com

not to mention:

http://www.rentacenter.com

after all, not everybody has been lucky enough to sock away any significant funds for the distant future of "retirement", and the gummint is likely to be difficult to pry away from the money that it has already promised to turn over to the street in the form of "voluntary private accounts" just to have it get blown at the bowling alley. But everybody has stuff to hock! And with an ever bigger housing payment, why shell out hard cash to buy when you can make a low low monthly payment on the sofa, stove, mattress, whatever. A sure bet if I ever heard one.

The only difficulty is to find some investors to hold the equity tranches...

Corporate Plebe
01-20-07, 02:50 AM
If the printing presses are running, that means the next bubble could be welfare. Subsidize the consumer-citizens who fit the evolving-expanding definition of poverty. Isn't that what a Federal Sales tax of 28% to 33% means? Our non-prescription drugs enjoy the same pre-tax priority as childcare, don't they? But they aren't "priorities," forgot, these are "benefits."

Healthcare -- subsidize it under new Fed Sales tax they say.

Makes you wonder what solutions we could entertain if Congress had the power to create money and not the Fed.
US Constitution: Article; Section 8, Clause 5.

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

Finster
01-20-07, 04:48 PM
House prices are not fundamentally different than any other price category when it comes to inflation - including prices of financial assets. The Fed is in the pickle it is now because it focused on consumer prices and allowed itself to believe inflation was low, while asset prices were skyrocketing.

The use of "owner's equvilent rent" in calculating CPI inflation only further compounds the problem. Real estate cap rates (the ratio between rents and prices) tend to track interest rates. When interest rates are cut to boost "growth" (inflation), cap rates fall, resulting in rents lagging far behind prices ... ironically cancelling out of our most quoted index of inflation a huge swath of inflationary price increases.

Last May, Justin Lahart wrote in the WSJ: "In other words, a hot housing market perversely depressed official inflation measures, and now a cooling housing market is pushing those measures up. Some bond investors are prepared to dismiss the statistical gymnastics. But Barclays economist Dean Maki says that would be a mistake. Price figures are simply getting back to normal after being unnaturally low for a long time, he says.

"It would be somewhat disingenuous for policymakers to strip out owners' equivalent rent now, when they weren't stripping it out before when it was keeping core inflation low," he says."

More: http://bigpicture.typepad.com/comments/2006/05/read_it_here_fi.html