Ben Bernanke, the new Fed chairman, has big shoes to fill. He is promising to continue Alan Greenspan's monetary policies. And just like the man who has been at the helm of the nation's central bank for 18 years, the new Fed chairman is likely to raise interest rates slowly to keep a lid on inflation—a move that housing executives are expecting.
At his Nov. 15 confirmation hearing before the Senate Banking Committee, Bernanke assured senators that he would pursue “continuity with the policies and policy strategies of the Greenspan Fed.” And he signaled that while he would proceed cautiously, he advocates a specific rate of inflation goal—an idea that Greenspan opposed.
Bernanke, 51, an expert on the Great Depression, is expected to raise interest rates at his first meeting on Feb. 1. As chairman of the White House Council of Economic Advisers and a Fed governor for three years, he is no stranger to taking action to sustain U.S. economic growth.
David Hill, chairman and CEO of Kimball Hill, says that although Bernanke is somewhat more conservative than Greenspan, he anticipates Bernanke to “continue raising rates simply because he's new, and he will want to try to establish his bona fides of continuing the tradition of a truly outstanding chairman.”
“I didn't make any alternations to our housing forecast when Bernanke was nominated,” says Seiders, adding that he expects the new chairman's approach will be “very, very similar” to Greenspan's. Seiders predicts that the 30-year mortgage rate will be 6.75 percent in a year.
Scott Hoyt, director of consumer economics at Economy.com, says he expects in the next year that the federal funds rate goes up three-quarters of a percent from the current 4 percent, and that translates into “enough to have some impact on the housing market and consumers.”
The housing market already has started to cool, and forecasters are saying that the 30-year mortgage rates are inching up. They are forecasted to reach 6.75 by the end of 2006, according to Doug Duncan, senior vice president of the Mortgage Bankers Association. The rate in November 2005 was 6.33.
“The impact on the builders is going to be that the housing market is going to slow a bit,” Duncan says. “When there is a rise in short-term interest rates, the advantage of taking an adjustable mortgage is reduced.”
Over the longer haul, housing experts do not think Fed interest rate policies under Bernanke will hurt the industry.