In the countdown to what might end up being the first rate hike in nine years, I will go on record to say that I think the Fed should just set the rate at zero, permanently, and allow fiscal policy to be the main regulator of the economy.
That would be ideal. It would eliminate the uncertainty of monetary policy and interest rate setting, allowing consumers and firms to plan. Then Congress, which has the power and authority to "coin money," can determine what spending and investments to make, if any, in order to keep the economy modern, productive and at full employment.
I doubt this is ever going to happen, but I thought I'd state it anyway. It would be my policy if I were running things. Anyway, the natural rate of interest for a currency-issuing nation that has a free-floating currency, and where all its debts are denominated in that currency, is zero, so the Fed should just institutionalize this fact by fixing the rate there, permanently.
Second, it is unnecessary for the sovereign to pay interest on its own currency that it can issue without limit. Third, it creates a sort of "welfare" system for the financial sector that leads to inequality and mal-investment. Fourth, there is a very weak link between interest rates, aggregate demand and employment to begin with, so rate setting as economic policy is very ineffective.
Enough about this.
This morning we saw yet another piece of data that gives ammunition to the Fed to go forward with that rate hike, today. Housing starts rebounded to a five-month high in November, clocking 1.17 million units, on an annual basis. In addition, building permits rose to 1.29 million units annually. Both numbers were quite strong and suggest that the housing boom is still very much alive.
In a number of my posts here on Real Money, I have written about the likelihood that housing starts, the housing boom and corresponding price increases are being driven by a need to "catch up" to a historically normal pace of construction.
The Great Financial Crisis caused home construction to fall to low levels not seen in recent memory. Normally, at an annual construction rate of 1.5 million units, which has been the average over the past 40 years, it takes about 75 years to completely turn over the nation's housing stock.
But during the financial crash, housing starts dropped to levels that implied a 225-year period of turnover. This was simply not sustainable. That is why I have said all along that the housing boom doesn't risk looking "toppy" until we hit at least 1.5 million starts annually ¿ and possibly higher. Case in point: In 2006 the pace of starts hit 2.27 million units annually, and in 1972 starts climbed to 2.5 million units annually. Both times those elevated levels of construction precipitated major corrections in the market. However, we are still far off those levels today. This is the primary reason why I believe home construction will continue to rise.
All along, I have said that this dynamic would be bullish for homebuilders. They simply are responding to increased demand and will continue to do so. The only thing that could threaten them would be the availability of resources (labor, building supplies) ¿ and that does not appear to be a problem right now.
The current dynamics of the housing industry are such that the pent up demand created by the Great Recession will continue to support this very important sector of the economy. This is bullish for the economy ¿ and bullish for the companies in this industry.