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The S&P / Case Shiller House Price Index showed a gain of over 1% in house prices in the 20 biggest US cities in September. Year over year, this is a gain of 13.3%, above 13% expected.

Even if the result were to come below expectations, a rise of over 10% in housing prices, and for the 7th time in a row, shows that prices of homes are consistently rising. One of the drivers of housing prices is the low interest rates, including the long term ones which the Fed depresses via its QE program. Is it time to taper bond buys in order to prevent another bubble?

Housing and the economy

The Fed has two mandates: inflation and unemployment. It isn’t meeting its targets, especially as unemployment is high. Also inflation isn’t exactly an issue. However, the Fed also has some responsibility to maintain stability in the financial system, especially in the aftermath of the global financial crisis.

Housing is a significant driver of growth: with every new house built, infrastructure is also built and services are consumed. An active second hand housing market also results in expenditure on furniture, transaction fees, etc. There is a strong correlation between the housing sector and the greater economy.

Yet this correlation works both ways: when the housing sector overheats, it can collapse, and when it collapses, everybody suffers.


Bernanke has two more FOMC decisions left. The last one is on January 29th, just two days before he steps down and he isn’t likely to lead any last minute move. So, the decision in December is the critical one where he can defend his legacy.

The Fed has recently been able to separate the concept of QE tapering from short term interest rates, meaning that less bond buying doesn’t trigger expectations of an imminent rate hike in the Federal Funds Rate, something the central bank was unable to do earlier.

The strong figure from Case Shiller joins better than expected building permits numbers for September and October.

A “Dectaper” – QE tapering in December is now closer than earlier perceived. The only missing piece in the puzzle is the all-important Non-Farm Payrolls report for November, due on December 6th.

It is now safer to say that a figure of over 200K job gains in November will lead the way to a decision on QE tapering on December 18th.

What do you think? How close is the Fed to tapering?