Can the Fed “Control” Our Free Market Economy?

I have received so many emails in the past 24 hours from readers, clients, friends and family regarding the David Leonhardt story in The New York Times, Will the Fed Reverse the Housing Slump? 

The Federal Reserve sent the stock market soaring yesterday (Tuesday). So can it stop the decline in home prices, too?

Don’t count on it.

From the late 1960s until 2000, the price of the typical American home and the income of the typical family moved almost in lock step. House prices rose a bit more quickly than incomes during the occasional real estate boom, but would always settle down again. In 2000, the median home cost about $130,000, roughly three times the typical household income — almost precisely the ratio that had held since the ’60s.

Then came a real estate boom unlike any before it. By last year, this ratio of prices to incomes had suddenly shot up to 4.5. For it to return to its old level, home prices would have to fall by an almost unthinkable one-third, and probably more in California, Florida and the Northeast.

I’m sitting in my office right now listening to two of my colleagues on the phone as they share their predictions with prospective clients regarding the possibilities of a Manhattan housing slump.  All of this is so amusing to me as so many factors come into play in determining what direction the Manhattan housing market will trend.  Of course both national and local economies play a large part as does foreign investment and the perceived health of Wall Street .  We would be fooling ourselves to think that our local housing market is immune to a slump but the anomaly that has been a healthy Manhattan market is hard to ignore.

Truth be told, I just don’t know what to make of all of it.  I will say that it appears we are seeing some increase in inventory locally but not sure how much effect it will have on market. I think weak Wall Street bonuses and layoffs will have the greatest effect on stagnation this winter but having said that, I know a lot of people (well qualified and not Wall Streeters) who are just waiting for an opportunity to buy. In the meantime, I’m keeping my fingers crossed for a slight market softening that increases inventory as well as number of transactions.