Housing Market Slowdown Doesn’t Worry Fed

Rising personal incomes should support the U.S. economy even as the housing market slows and consumers lose the boost they have been getting from home equity, Federal Reserve chairman Ben Bernanke said in a letter released to the media yesterday.

“Rising disposable incomes should enable household spending to expand at a moderate pace and provide continued support for the overall economic expansion,” Bernanke said in an August 18 letter, addressed to U.S. Rep. Ginny Brown-Waite, a Florida Republican.

Bernanke said that should be the case even though smaller gains in home equity would likely lead U.S. households to save a greater percentage of their current income. Increases in Florida home mortgage borrowing costs, along with resetting rates on adjustable loans, have taken major tolls on housing demand locally in the past year.

“The rapid pace of home price appreciation in recent years likely contributed to the decline in the saving rate. Similarly, the cooling of the housing market and associated reduction in capital gains on housing will probably provide some upward impetus to the saving rate,” he said.

Statewide and nationally, mortgage loan demand reached a longtime low this week, prompting many concerns about the market’s future. Bernanke’s letter was responding to written questions submitted in conjunction with a July 20 hearing on the U.S. economy held by the House Financial Services Committee at which he testified.

Brown-Waite asked the chairman of the U.S. central bank what impact an increase in the minimum wage might have on inflation at a time when energy prices and labor costs were rising.

Bernanke assured her that the Fed is alert to the inflationary forces that she describes, and believes a minimum wage increase would push up labor costs in companies that employed the affected workers, fewer than 2 percent of wage and salary workers were paid at or below the U.S. minimum wage last year.

We’ll be monitoring the impact of the housing market on the local economy, as well as the Florida mortgage rates that dictate a major part of market activity.