July 12, 2013, 6:02 a.m. EDT

Has Fed killed housing, and with it, the economy?

Commentary: Higher home prices have been most positive development

Higher home prices have helped the economy by increasing the wealth of the middle class.

WASHINGTON (MarketWatch) — Has the Federal Reserve strangled the recovery by hinting that it would soon ease back on the throttle?


Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed won’t let higher interest rates strangle the economy.

Will higher mortgage rates stop the housing market in its tracks?

Or is the economy now steady enough that the Fed can take off the training wheels by tapering its bond purchases?

How the economy — and particularly the housing market — handles the spike ininterest rates will be a key factor in the timing and pace of the reduction in bond buying by the Fed, which could begin as early as September.

Fed Chairman Ben Bernanke said Wednesday that one of the biggest risks facing the economy right now is that higher interest rates could stop the housing recovery in its tracks. Housing is now the brightest sector of the economy, and if it stumbles badly, you can expect the Fed to reverse the taper and buy more bonds.

The rebound in housing certainly looks robust enough to cope with somewhat higher rates, but no one can know in advance how lenders and would-be borrowers will react to the news that the rate on a 30-year fixed mortgage has risen from 3.45% in April to 4.51% today. Rates are up compared with last month and last year, but in historical context, they’ve rarely been lower.

Luxury renters pour thousands into upgrades

Luxury renters in the country’s hottest real-estate markets are spending tens or even hundreds of thousands of dollars on renovations – even though they may have to return the space to same condition it was leased.

It might be September before we’ll begin to know with any confidence if housing is beginning to weaken.

To decide when they should taper the number of bonds they buy, Fed officials will be focused most intently on the jobs data. Steady job growth of around 200,000 per month may be telling them to go ahead in September, but they’ll want some confirmation from the financial markets and the housing market before they do it.

So far, financial markets have passed the test. Although long-term interest rates have soared, there has been very little disruption in the markets. Equities have been volatile, but the record level of the S&P 500 SPX -0.13%  on Thursday suggests that investors, at least, don’t think higher interest rates will hurt economic growth, profits or market sentiment. Specialized indicators of financial stress are also encouraging the Fed to take the next step.

But what about housing? After six years as an anchor pulling the economy down, housing is finally contributing to growth, employment and household balance sheets.

New home construction is up 34% in the past year, construction employment is up by 190,000, and home sales are rising steadily.

But most importantly, home prices are up. Higher house prices have all kinds of beneficial effects on the economy (as long as they don’t get too bubbly, of course).

The increase in home prices over the past year is the best economic news the middle class has had in years. Contrary to what my colleague David Weidner wrote earlier this week, the housing recovery has been good for the bottom 99%, or at least the 66% who own a home.

  1. […] REX NUTTING July 12, 2013, 6:02 a.m. EDT […]

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