The housing market is on the verge of spinning out of control. Just about everything that could be going wrong is going wrong.
The only holdout for the moment is home prices, which are up an astonishing 22.5% just this year. For many homeowners, that’s great news. Home equity is a huge source of wealth for middle-class Americans. And when home prices are high (just like when stock prices are high), you feel wealthy.
Unfortunately, like stocks, home prices can drop like a rock at a moment’s notice. That’s one lesson we learned all too well in 2008. Another Great Recession-type plummet in home prices forces many buyers underwater, stranding them with an asset they overpaid for and can no longer afford, and can’t even sell.
Let’s start our brief examination of today’s overheated housing market by taking a glance at how the Fed has been propping it up so far.
How the Fed props up housing prices
The Fed employs various financial interventions to coax the economy in the direction they choose. We know the words: quantitative easing. Lowering interest rates. Repo and reverse repo. Obscure financial hocus-pocus that nevertheless moves markets worldwide.
When it comes to the housing market, the Fed doesn’t need to do anything fancy. They just create artificial demand for mortgage-backed securities (MBS, also known as one of the notorious “toxic assets” that poisoned the U.S. in 200
.
Mike Shedlock revealed the trick:
In a single week the Fed added $22 billion in mortgage backed securities, nearly all of which had a duration of 10 years or longer. This is an ongoing process despite major subtractions via reverse repos. In the process, the Fed gooses housing by extending the duration of the assets it does hold, effectively lowering long-term interest rates in the process.
See? If the Fed wants to “support” housing prices, all they have to do is buy up mortgages. That keeps mortgage rates low, which lets Americans buy more and bigger houses, which stimulates the construction sector, which means lots of jobs for roofers and plumbers and realtors and bankers.
It’s a win/win! Right?
Well, not exactly. Because the Fed is creating artificial demand, this upsurge in housing construction, consumption and prices is based on an illusion. Your house isn’t worth more because suddenly everyone wants to live in your neighborhood. Your house is worth more because the Federal Reserve is buying up mortgages.
All this construction activity, all this growth in the appraisal value of homes isn’t based on market forces. It’s artificial.
See also 2021's Uncanny Resemblance to 2008
Which means, the moment the Fed removes its support, these artificial prices will collapse.
In the meantime, though, millions of Americans are left feeling extremely wealthy and very self-satisfied as they look around the inside of their beautiful bubble.
And what a splendid bubble it is.
Today’s housing bubble makes 2008 look quaint
http://www.investmentwatchblog.com/heres-why-the-housing-market-has-gone-from-overheated-to-raging-inferno/
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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