Wells Fargo: Fed Stimulus to Set Up Improved Market for 2013

By Tory Barringer 9/17/12 – –

While the Federal Reserve next stimulus may not greatly speed up the housing recovery, it should provide a good boost to spring 2013, Wells Fargo reported Monday.

The bank’s Economics Group issued a special commentary in its Housing Data Wrap-Up for August 2012, examining the potential effects (or lack thereof) the Fed’s new plan may have on housing and updating its forecast for the market.

Fed chairman Ben Bernanke revealed earlier this month plans for a third round of quantitative easing. In hopes of stimulating activity and reducing unemployment, the Fed plans to purchase $40 billion per month of mortgage-backed securities until there is evidence of a self-reinforcing economic recovery.

The Fed’s influence should put downward pressure on long-term interest rates, but Wells Fargo says the benefits from such a move will be modest at best, citing already-low mortgage rates. The bigger issue at hand is the “fiscal cliff,” which has led to a slowdown in hiring and turned back gains in consumer confidence.

“What really ails the economy is the lack of a coherent fiscal policy, and monetary policy is not a perfect substitute for fiscal policy,” Wells Fargo’s Economics Group said. “Any benefit to the housing market from the Fed’s latest move is likely limited until we see some resolution to the issues surrounding the fiscal

cliff, which means the real payoff from even lower mortgage rates likely will not be apparent in the housing market until early 2013.”

Even without the Fed’s help, Wells Fargo said the housing recovery has picked up speed in the past year, evidenced by solidifying prices and declining foreclosures in many markets. The bank believes that prices have finally bottomed out and expects most price measures to rise at around a 2 percent annual rate over the next few years.

If, as the group expects, home price improvements have been exaggerated by seasonal factors, prices will likely soften a bit toward the end of 2012 and the beginning of 2013.

Meanwhile, sales of new and existing homes have improved for the past year and are set up for even stronger gains in 2013. From January through July, sales of existing homes saw sizable increases, with single-family homes up 7.9 percent and condominiums and townhomes up 3.2 percent.

While sales have increased so far this year, they appear to have stalled a bit during the late summer. Furthermore, many builders are noting an increase in cancellations. Both issues are attributed once again to the approaching fiscal cliff.

Although the new round of quantitative easing is not expected to have great effect on interest rates, Wells Fargo expects that the added attractiveness of non-agency mortgages and the added liquidity to the mortgage market will boost builder and lender confidence, leading to a real boost in sales and construction for spring 2013.

“This may have been part of the motivation for the Fed’s actions,” the group said. “Monetary policy is typically more effective when it is going with the tide instead of trying to reverse it.”

Assuming that economic growth remains more or less flat and the fiscal cliff is safely avoided, Wells Fargo expects that the housing recovery will continue in slow turns until finally rising back up to normal conditions in the second half of the decade.