Unconventional Wisdom -- Ben the builder :: Macquarie Research,

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Unconventional Wisdom
Ben the builder
Event
 Recent speeches and policy decisions by the Federal Reserve point to a new
focus on the US housing market.
Impact
 One of the biggest drags on US growth in the recovery has been new home
construction. Although this was an inevitable consequence of previous
excesses, apparently the Federal Reserve has decided that it has continued
for too long.
 Boosting residential construction when the only real tool is monetary policy,
however, is unlikely to be easy. One of the few options is to attempt to make
alternatives, such as existing homes, more expensive by encouraging
demand. Another option is to open up a positive gap between rental yields
and borrowing costs. A weak US$ will also help. All call for a sustained period
of low real long-term interest rates.
 If a long period of extremely low interest rates does not work then the FOMC
may have to consider more aggressive intervention in mortgage markets to
lower the cost of funds even further.
Analysis
 The recent decision of the FOMC to reinvest the proceeds of maturing
securities into mortgage-backed securities rather than Treasuries was a
surprise. Yet it is just the latest in a growing list of hints that the Federal
Reserve is prepared to take direct measures to give the housing industry a
boost.
 In early September the Fed hosted a policy forum that looked at the outlook
for the housing market. Federal Reserve governor Elizabeth Duke spoke at
the forum and made the point that the housing market is severely out of
balance and hampering the recovery. She outlined a number of proposals that
could help, such as conversion of foreclosed properties into rental properties.
 While most of these proposals would be outside the control of the Fed, the
fact that a key policymaker made these suggestions shows the growing
sensitivity about the ongoing slump in the US housing market.
 The president of the Boston Federal Reserve Eric Rosengren also recently
made a speech at a conference in Sweden on the economic outlook. He
chose to concentrate on the problems of US housing, concluding with a
clarion call for action: “We need to recognize the urgency of the situation and
the broader economic implications of housing’s continued struggles.”
 The Rosengren speech contained a number of charts highlighting the
enormous underperformance of the housing sector during the first two years
of this recovery in the US. This contrasts with a slightly stronger recovery in
business investment and a much better export performance