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The U.S. housing recovery, considered a slam dunk by the vast majority of economists since spring 2012, has sputtered since summer 2013. Even though most economic indicators have been pointed higher in recent months, real estate has been the odd man out. Housing starts have been wildly unstable from one month to the next and are hardly increasing at all. At less than 900,000 housing units in June, they are on par with end-2012 and still a long way away from returning to their long-term average, while many observers predicted they would do so by the end of this year.
How worried should we be? What would happen if activity in this sector failed to return to normal levels during the current cycle? What weight will the Fed give to these disappointments in its decision-making process?
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The Upcoming Fed Meeting: Playing for Time
Most pundits agree that the question isn’t if the Fed will taper off its liquidity injections, but by how much. And they hope to find answers in the minutes of the next FOMC meeting a month from now. It’s unlikely the Fed will backtrack from previous guidance; even that was enough to steer markets back in the right direction. Long-term interest rates are returning to more normal levels, and capital is starting to flow back into money-market funds. An about-face by the Fed at this point would be more likely to wreak havoc than anything else. However, a closer look reveals that the economic indicators predicating investors’ newfound optimism don’t actually point to a U.S. recovery (see below). Many of these indicators remain weak, signaling that the world’s largest economy isn’t strong enough yet for a return to regular interest rate levels.