U.S. new home sales jumped 12% in March

to a record 1.431 million seasonally adjusted annual rate, the Commerce Department estimated Tuesday.

This bit of news should be contrasted with Stephen Roach latest commentary. He sees the Federal Reserve responsible for the current real estate bubble, as it was responsible for the stock market bubble of the late '90's:

"It all began with Alan Greenspan’s worries over “irrational exuberance” on December 5, 1996, when a surging Dow Jones Industrial Average closed at 6437. The subsequent Fed tightening in March 1997 was aimed not only at the asset bubble itself, but at the impacts such excessive appreciation in equity markets were having on the real economy -- consumers and businesses alike. It was a classic example of the Fed playing the role of the tough guy...

Predictably, there was a huge outcry on Capitol Hill as the Fed took aim on the stock market. But rather than stay the course as an independent central bank should, the Fed ran for cover in the face of political criticism. Not only were its initial bubble-containment efforts put aside, but Alan Greenspan went on to champion the notion of a sea-change in the macro climate -- a once-in-a-century productivity miracle that would justify the stock market’s exuberance as rational. That was the Original Sin that has since been compounded in the years that have followed."

The problem is that "decision makers in the real economy -- consumers and businesspeople alike -- mistake the Fed’s point of view for strategic advice. And so do financial market participants. After hearing the Fed pound the table, consumers feel left out if they don’t spend their housing equity. Business managers felt equally deprived in the late 1990s if their companies didn’t achieve the dotcom-type valuations in the stock market that Chairman Greenspan insisted in the late 1990s and even early 2000 were well grounded in a once-in-a-century productivity miracle. The resulting overhang of excess IT spending was a direct outgrowth of this perceived deprivation. Needless to say, when investors and financial speculators saw the equity train leave the station and the Fed condone the high growth of a productivity-led economy by leaving interest rates low, they saw no reason to believe that a bubble was about to burst. When consumers hear from a Fed chairman that it makes little sense to take on fixed rate debt, they rush to floating rate instruments; not by coincidence, the adjustable rate portion of newly originated mortgage debt shot up in the immediate aftermath of Chairman Greenspan’s comments on consumer indebtedness. And should asset-dependent, saving-short, overly indebted American consumers feel at risk if the Fed assures them that there is no housing bubble -- that the asset-based underpinnings of their decision making are well grounded? A record consumption share in the economy -- 71% of GDP since 2002 versus a 67% norm over the 1975 to 2000 period -- speaks for itself. The rhetorical flourishes of America’s central bankers have dug the US economy -- and by definition, a US-centric global economy -- into a deep hole. To this very day, the Fed has never confessed to the Original Sin of condoning the equity bubble. On the contrary, Greenspan & Company have been on the defensive ever since by dismissing the increasingly dangerous repercussions of the original post-bubble shakeout. Far from playing the role of the tough guy that is required of independent central bankers, the Fed has become an advocate of the easy money of a powerful liquidity cycle. One bubble has since begotten another -- from equities to bonds to fixed income spread products (i.e., emerging market and high-yield debt) to property. And financial markets have gone along for the ride -- not just in the US but also around the world as global investors and foreign central banks have rushed with reckless abandon to finance America’s record current-account deficit.

Categories: economy, interest rates, real estate