Wednesday, November 13, 2013

Janet Yellen on Housing

Updated February 2014

Now that Ms. Yellen's has taken over at the helm of the Federal Reserve, I thought that it was timely to take a look back at some of her historical comments on the American economy and see just how prescient she was.  In the first posting of this three part series, I looked at her commentary on the American job market.  In this posting, we'll be looking at what Ms. Yellen had to say about the United States housing market back in December 2006, just as the wheels were coming off the "housing bus".

Here is the quote:

"The correction in the housing sector has continued, even sharpening somewhat compared with our expectations.  Still, there are some encouraging signs that the demand for housing may be stabilizing, probably assisted by recent declines in mortgage rates. After a precipitous fall, home sales appear to have leveled off.  In addition, equity valuations for homebuilders have continued to rise in the past couple of months, suggesting that the outlook for these businesses may be improving.  Finally, the gap between housing prices and fundamentals may not be as large as some calculations suggest because real long-term interest rates have fallen quite a bit recently, raising the fundamental value of housing. That said, the housing sector on balance is a source of downside risk, and the risk could be magnified if mortgage rates were to rise again as foreseen by the Greenbook." (my bold)

Let's look at all three highlighted portions of her comments.  Here's a chart showing what happened to housing prices after this meeting took place:

Within two years, house prices had dropped by a little over 25 percent.  So much for the "fundamental value of housing.".

Here's what happened to the demand for housing in the U.S. as measured by sales numbers for single family homes after this meeting took place:

Within two years, single family home sales had plunged from 1 million to just over 330,000, a drop of 67 percent.  So much for a "levelling off" of home sales.

Lastly, let's look at what happened to the share price of D.R. Horton Inc. (symbol DHI), one of the largest homebuilders in the U.S., known for building relatively low cost homes after this meeting took place:

In late January 2007, DHI hit a high of $30.86.  By mid-November 2008, DHI had fallen to $4.34, a drop of 86 percent.  Since then, the stock has risen rather steadily, but it never regained its January 2007 high.  As far as profitability went, it took D.R. Horton until November 2012 to see its profits return to 2006 levels.  So much for "equity valuations for homebuilders continuing to rise".

As we can see from Ms. Yellen's commentary on the housing market and the employment situation, it would appear that central banking is a crap shoot, the only difference being that the house (the Federal Reserve) rarely wins, despite their efforts.


  1. There was one reason and one reason alone that caused the "housing bubble" to form. The parasites that make big commissions on each house transaction, they caused it because they lobbied the laws to change to make the transactions take place again. They do not care if the sale is valid or not, they just wanted their commission(s). We need some big time reform in loan law etc related to housing sales. For those that are buying the home to live in and not buying as an investment, should be the priority and the only type of sales taking place. The real price of the house would get closer to reality, rather than investment speculators pushing up a $500 box up to a $1.5 million sale. When it comes time to step back and access the real value of a box, you will see that $500 box needs to be leveled and a new box put up.

  2. It appears Yellen missed all signs of a bubble. It doesn't matter the cause of the bubble, it only matters that she was clueless. I would be more comfortable with someone who understands supply and demand and has a solid business background to head the central bank.

  3. Both parties created this mess. An after shite hit fan, there were lots of Monday morning quarterbacks.