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Tuesday, July 12, 2005

Bernanke on Housing: Market Forces, not Speculation

by Calculated Risk on 7/12/2005 11:27:00 AM

Ben Bernanke gave his first speech this morning as the new chairman of the White House's Council of Economic Advisers. At the American Enterprise Institute, Bernanke commented on housing:

"While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom,"
I disagree. Speculation, including excessive leverage, appears rampant in many markets.
Those fundamentals, Bernanke said, include low mortgage rates, rising employment and incomes, a growing population and a limited supply of homes or land in some areas.

"For example, states exhibiting higher rates of job growth also tend to have experienced greater appreciation in house prices,"
I disagree. Low mortgage rates are not a housing "fundamental", employment in California (one of the hottest real estate markets) is struggling, and population growth / limited supply of land was true 10 years ago too when housing was in a bust.
"The administration will continue to monitor" developments in the housing market, Bernanke said. "However, our best defenses against potential problems in housing markets are vigilant lenders and banking regulators, together with perspective and good sense on the part of borrowers."
And on the budget deficit:
"One consequence of the strong income growth we are enjoying is higher-than-expected levels of tax collections so far this year which, if maintained with spending controls, will reduce the government's budget deficit for this year well below its projected level,"
This is laughable. There is a small improvement in the deficit this year, due to one time events, but next year will be worse.

As the Chairman of the CEA, it is understandable that Bernanke supports the Bush Administration's positions.