It would appear that the Federal Reserve is beginning to wake up to the harsh reality that the power to create money through credit is not tantamount to either omnipotence or even intermediate term price supports. It’s not what they’re saying that is interesting, as all they’re doing is stating the completely obvious. But it is very interesting indeed that it is two economists at the Dallas Fed who are stating it in public in their Economic Letter entitled “The Fallacy of a Pain-Free Path to a Healthy Housing Market“. They write: “Without intervention, modest home price declines could be allowed to resume until inventories clear. An analysis found that home prices increased by about 5 percentage points as a result of the combined efforts to arrest price deterioration. Absent incentive programs and as modifications reach a saturation point, these price increases will likely be reversed in the coming years. Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices, which cannot escape the pressure exerted by oversupply.”
Speaking of stating the obvious, the “analysis” sounds like a joke. Home prices have been around 170,000, so 5 percent is $8,500. Coincidentally enough, the 2009 federal tax credit was $8,000. Imagine that. Anyhow, consider yourself warned, as housing prices should be heading down next year and the decline probably won’t be as modest as the Fed would prefer.