Obama Stimulus May End Up Hurting the Economy it Was Supposed to Have Helped
by ilene - May 29th, 2009 8:24 pm
Courtesy of Martin Hutchinson
Contributing Editor, Money Morning
Obama Stimulus May End Up Hurting the Economy it Was Supposed to Have Helped
Could the massive Obama stimulus plan end up hurting the U.S. economy?
It’s long been a worry, and now it’s beginning to seem possible.
The latest housing reports suggest that the recent rapid run-up in 10-year Treasury bond yields may be having an unhealthy effect on the U.S. housing market. That tells me that – although home prices are back to their long-term average in terms of earnings – we may not yet be close to the price bottom.
If that’s true, it’s very bad news. A further substantial decline in housing prices would destabilize the U.S. banking system again, because of all the mortgage debt in it, which would cause a very nasty "second leg" economic downturn. That would have one very ironic further implication: U.S. President Barack Obama’s $787 billion stimulus package – intended to help the U.S. economy push back the recession – would instead have succeeded in pushing it deeper into the mire.
A month ago, it appeared that the housing market might be in the process of bottoming out. The ratio of house prices to average incomes – which peaked at about 4.5 to 1 in 2006 – had fallen 33% from that apex, which brought the ratio close to its long-term average of 3.2 to 1, according to an S&P/Case-Shiller Index report. While interest rates remained low and government-backed home financing was readily available, it appeared the forces pushing up house prices (low interest rates and accessible financing) might soon come into balance and then dominate the forces that push home prices down (an inventory overage).
The jump in interest rates – from 2.07% on the 10-year Treasury bond in December to around 3.65% today – has weakened the case for a stabilization of housing prices. Mortgage rates, which were far below their levels of the last 30 years, have moved back above 5% — even for "conforming" mortgages. Thus the Mortgage Bankers Association index of new mortgage applications was down 15% in the latest week. Meanwhile, new home sales have merely stabilized at very low levels of an annual rate around 350,000 – compared to more than 2.0 million at the peak of the market, while the latest price statistics suggest that price…