Ben Bernanke's No Surprises Strategy: Bad News for Home Buyers?

Federal Reserve Chairman Ben Bernanke has been cautious yet deliberate with his words as he's outlined the direction the Fed likely will take over the next few years. Bernanke believes that stimulus funding and similar programs need to stop so that we can start addressing America's "unsustainable" debt levels.

So how will this affect home buyers? Although effectively endorsing economic austerity as a remedy, in which government reduces spending and/or increases taxes and interest rates, etc., Bernanke stressed that such a policy should be implemented very transparently and gradually -- at least domestically.
This "no surprises" strategy serves to not spook investors and markets causing negative knee-jerk reactions, specifically here at home. So don't expect a change in taxes, rates, or a reduction in spending without a series of forewarnings. But beware: They are coming.

Bernanke's testimony is timely, since Europe seems to be done with economic stimulus measures. Germany is leading the way by proposing spending cuts and new fees intended to reduce deficits. Britain and Japan are right behind with their own deficit-cutting measures. They'll either look really smart or really stupid, as such immediate deficit-trimming during uncertain economic times is rather risky, to say the least.
So how and when does the Fed address the unsustainable level of debt here stateside? That's the trillion-dollar question. The U.S. is still the world's so-called safest economy, and as such has the luxury of playing wait-and-see with such a strategy. And this is exactly what Bernanke is advocating: laying out a dynamic (read: amendable) long-term plan, and implementing each step of that plan as time and circumstance dictate.
Knowing this, Bernanke spoke with relative optimism about the economy, but threw out about a dozen caveats -- from the Gulf oil spill to the state of the real estate market -- as heavy influences on any policy movements the Fed may take. Personally, I can't see where the stability or growth comes from to warrant such budget cuts and/or increases in rates and fees in the immediate future. But again, they are an inevitability.
With the world's investors seeking safe haven in U.S. Treasuries when headlines dictate risk elsewhere (read: a declining euro and global-market issues), mortgage rates could stay around 4.5 percent to 5.5 percent for some time. However, tight credit and other qualifying standards are suppressing demand, witnessed by mortgage applications at their lowest levels since 1997. Distressed shadow inventory likely will suppress property appreciation for years to come.
As for home sellers, the near future isn't pretty. I wouldn't bet on the housing market rising out of a saw-toothed bottom until 2012, at the earliest. There needs to be some real cost innovation within the real estate and mortgage industries, as well. Oh yeah, then there is this pending commercial real estate issue, too.

Thus, raising benchmark rates doesn't seem to be a viable strategy in the near term. So those shopping for a home will find the market optimal right now; and maybe even tomorrow and beyond.
Then there is the unemployment problem. Bernanke said it would take a long time to recover the 8.5 million jobs lost over the past few years and he may have been letting his actions speak as to how this situation begins to rectify itself. He attended an event to praise programs at community colleges that help people find work. The message: The jobs of today and the future require different skill sets than those of the past. Go (back) to school and learn a relevant trade or profession. If this is indeed the prevailing view, expect unemployment to stay uncomfortably high for a few years.
So are we headed toward a Lost Decade of Growth, or an economy laced with higher taxes, interest rates and inflation? The type of recovery plan that forces one to balance the reduction of debt without crushing economic growth is a long, slippery slope, one that is sure to be filled with pockets of pain.

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