“Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap” Ron Paul 2007
The real estate market as measured by price increase (not volume of sales) is recovering. This recovery is mainly attributable to low interest rates engineered by the Federal Reserve’s quantitative easing (money printing) policies combined with low for sale inventory.
-the foreclosure rate has been dropping and fewer distressed properties are being put on the market (although there are signs that this trend may be reversing);
-many home owners are still underwater from the last real estate bust and can’t sell;
-still other home owners who have positive equity in their homes are viewing the recent uptick in home prices as a sign that prices will continue to rise and are holding back on listing their homes hoping for higher prices; and
-new home starts in the past five years are well below their historic average
with the combined potential to increase significantly the amount of inventory, the Fed starts making noises that it may “taper” its bond buying program which has held interest rates low. A “tapering” from $85 billion a month of Mortgage Back Securities and U.S. Treasuries to $65 billion would still be a highly accomodative $780 billion a year program! See Chart.
While the Fed’s QE program may have ignited the real estate (and stock) market(s) with low interest rates in a market with tight inventory, it has been ineffective in stimulating the rest of the economy and the job market.
a strong pipe line of new home buyers is failing to materialize as millennials suffer from under employment, higher unemployment rates and crushing student loan debt (also caused by easy money policies).
Thus, the Fed’s “No Exit” Dilemma -they have heated up the market with their Abracadabra QE experiment, but they can’t cool it down because to do so would cause a sudden reversal in the housing and stock markets.
The Fed may have created a brief shining moment in the real estate and stock markets before the crash. But don’t worry, there will be many more such moments as the Fed’s reaction to any crash is to print more money to try to reheat the economic souffle.
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