Saving Financial Markets Fed’s Priority Not Real Estate

credit crunch worsens economy By Mike Colpitts
Editor

Taking its most aggressive action in years, the Federal Reserve is attempting to save the U.S. economy from falling into an economic depression. The infusion of $200-billion into the money markets is intended to theoretically act to help mortgage lenders, banks and other lenders from failing.

The credit crunch has sent financial markets reeling and stock prices to new record lows in many cases. But the Fed’s priority has clearly become a balancing act to heal the nation’s real estate markets, which have been in recession for more than a year throughout the majority of the country, and at the same time aid financial markets. But the shift has clearly occurred as the nation’s economy has worsened away from real estate and into the overall economy.

Prices of homes and other property in many areas of the country have been in a free fall and many real estate owners have become increasingly nervous over the future of the state of the nation’s economy.

Federal Reserve Chairman Ben Bernanke has pledged to use the full capability of the Fed to “fully employ” the Fed’s authority to alleviate the epidemic of foreclosures.

The Fed has an arsenal of responses in its attempt to right the ailing national economy and the housing crisis, but has not offered additional recommendations to halt the 5.6-million foreclosures forecast by Housing Predictor through 2011.

Government officials have been careful in their wording not to call the infusion of money a bail-out, apparently because the over-whelming majority of Americans surveyed are against such a plan. But the scenario is as close to a bail-out as otherwise could be recognized since the collateral for the debt will be securitized by mortgages, at least hundreds of thousands of which will end up in foreclosure.

Whether the U.S. real estate markets are in a free fall similar to that of Japan is difficult for analysts to determine, but at least some housing markets remain relatively healthy. Japan experienced deflation in real estate 16 years with little change.

Real estate markets scattered throughout at least six states remain active suffering less impact from the financial crisis. Many veteran real estate investors are buying property believing either the bottom of the market is near or at least in a place where they feel comfortable enough to take action.

As the clock ticks and economic turmoil worsens, there are fewer and fewer options for the Fed to take serious action to alleviate the financial crisis. The bail out of Bears Stearns on Friday by JP Morgan and the Fed are indications that the crisis has clearly gotten to the point where fewer options are available.

The Fed has clearly been late to react more than a few times during the course of the crisis and appears unable to resolve the crisis before it triggers worsening financial times. It took the Fed much longer than most to realize the magnitude of the crisis.

The White House and the Fed are now finally in crisis management modes. However, real estate markets typically take from 3 to nine months to show changes in direction after interest rate adjustments alone, and it will take much longer for any other changes to become evident. There is little hope among real estate analysts that they’ll show up on time to the party this time to make a difference.