Today's Homebuilder Confidence Miss Destroys One Of The Biggest Myths About The Fed

Homebuilder confidence missed expectations this morning.

What's really interesting is why:

"Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values," said Rick Judson, NAHB Chairman in a press release.

There's a myth out there that the Fed is engaging in crazy-loose monetary policy and inflating bubbles.

But when you have homebuilders saying that there's significant demand for new homes, but that the credit isn't there to satisfy that demand, then you know that credit is not that loose.

Why do people assume that money is loose? Because they believe that low interest rates are evidence of loose policy. But actually that's not the case.

The easiest way to prove that is to just look at a long-term chart of 10-year yields.

Back in the late 70s, and very early 80s, interest rates were well into the double digits. Do people associate this time with very hard, tight policy? Of course not! The period of rising rates are associated with a Fed that was too loose, and had lost control of inflation.

Now we see the inverse, where interest rates have been declining, due to lack of inflation, growth, and a belief that the Fed will respond aggressively to beat back inflation. The market is saying that the Fed is still to tight (no inflation being generated in the economy, no growth) and the homebuilders are confirming that view.