I ask myself this same question. Any action which slows the housing bubble, such as raising interest rates and providing guidance on lending standards (i.e. this week’s OCC guidance to reduce risky lending), will bring the housing market to a screeching halt. This is because ARM holders can’t meet the higher payments and new borrowers can’t qualify for the loans needed to get into the houses they wish to buy. The OCC guidance doesn’t even carry any weight – it’s only a guidance. Even as the OCC issues guidance, at least one lender did just the opposite this week (see http://www.f*ckedborrower.com), and dropped their lending standards further, in the spirit of competition; they don’t want their customer to go to another lender with lower standards. One day out of bankruptcy is now good enough, the lowest of 3 FICO scores instead of just the average. The looser the standards, the more risky borrowers get loans, the worse the results when it collapses.
What can the fed really do? Any action reducing home prices:
1) reduces people’s retirement nest egg that is in home equity,
2) shuts down the housing ATM that is propping up the economy (with 1/3 of GDP a result of consumption) and
3) eliminates the source of most of the new jobs: the real estate related service and goods. Mortgage companies, home improvement stores, furniture retailers, remodeling and contracting businesses, realtors, escrow and title companies, are all at risk.
What would you do if you were Ben Bernanke? Wait and see what happens this spring? Print more money? I’d love to hear what others think.