Feds Efforts to Revitalize Economy Bolstered by Strong Housing Market By Korollos Shalaby

The Federal Reserves efforts to revitalize the United States economy are being bolstered by an increasingly robust housing market.

With interest rates remaining near record lows and home values on the rise, homeowners and banks are beginning to see their financial situations improve. According to Bank of America Corp. and Deutsche Bank AG, this is making it easier for financial institutions to give out more lines of credit.

Were in the very early stages of a reinforcing cycle, said Michelle Meyer, a New York-based senior economist at Bank of America, the second-biggest U.S. lender by assets. The Fed has been quite impactful.

Meyer has predicted that monthly housing starts could reach upwards of 1 million by the end of 2013, as opposed to 894,000 from last October. According to Deutsche Banks Joseph LaVorgna, Residential construction may also continue to improve the housing market. It has been projected that construction may add to the nations GDP for the first time since 2005. And if the current trend continues, construction may account for around 1 percent of the U.S.s GDP by the next year.

The one thing missing from this economic recovery was a healthy contribution from housing, and we might finally be on the cusp of that, said LaVorgna, chief U.S. economist for Deutsche Bank in New York, who predicts the GDP may grow about 2.5 percent in 2013. Housing is going to be integral to the economy. Were assuming it continues to do some of the heavy lifting.

In its effort to continue to improve the housing sector, the Fed indicated last September that it would buy nearly 40 billion of mortgage backed securities to stabilize the market. This so called quantitative easing has had its critics though it has certainly shown some signs of success.

Borrowing costs were driven down to all-time lows thanks in part to the central banks decision to continue to purchase large volumes of housing debt. Now, the average rate for a 30-year fixed mortgage is 3.32 percent. This is only slightly higher than the all time low of 3.31 during the previous week.

Home prices in the U.S. continued to rise from the previous year and saw the largest increase since June of 2006, according to the data provider CoreLogic Inc.

The sales for new and existing dwellings combined rose to 5.16 million for October, which was 40 percent higher than June of 2010.

Many economists are optimistic at the pace of progress, though it is equally true that this optimism has been largely tempered for quite some time with the knowledge that things could go very wrong very quickly.

Monetary policy is working, said Yelena Shulyatyeva, a U.S. economist at BNP Paribas SA in New York. What weve seen is a very robust housing recovery this year, particularly in prices. Its kind of an accelerator for other sectors of the economy, consumption in particular.

With a deficit fight still looming large in Washington, its hard to predict what impact if any it will have on housing.

Korollos Shalaby is a nationally acknowledged mortgage expert with over 6 years experience as a loss mitigation expert and mortgage finance consultant. He has owned several companies and has been at the forefront of all lending and banking practices since 2006.

Tags: Federal Reserve, housing market, monetary policy