I guess I don’t buy your premise, its a pretty unlikely possibility, we have never had a decline in housing prices on a nationwide basis ” Ben Bernanke July 2005 responding to a question that housing prices might come down.
Updated March 29, 2015
Bernanke was correct in saying at the time* that there had never been a decline in housing prices on a nationwide basis. What he was oblivious to was that home prices were rising nationwide faster then they ever had because his predecessor Federal Reserve Chairman Alan Greenspan had brought the Fed Funds rate down to 1%. By mid 2007 the housing market party was over and prices began a four year nationwide decline.
Fast forward to 2015: The Fed has learned that you can reheat an economic souffle. We are in the midst of another housing bubblet driven by Ben Bernanke and Janet Yellen’s Fed Funds Rate at 0% and massive doses of quantitative easing (QE) that involved the Fed buying $85 billion a month worth of mortgage backed securities and U.S. Treasury Securities.
While the Fed and others cheer on the rise in housing (and stock market) prices as good for homeowners and the economy, there is a dark side to rising home prices.
Rising Home Prices:
The current surge in home prices is not driven by strong economic fundamentals like higher productivity, wages and labor participation rates, but rather by artificially low interest rates orchestrated by the Federal Reserve’s zero interest rate policy and quantitative easing programs.
Home prices are artificially rising by Fed design. So, who cares? higher housing prices, no matter how generated, are a good thing, right?
Raise Home Affordability
Ask a first time homebuyer, a part time worker or anyone looking for a home if higher home prices are a good thing. Higher home prices shut would be homebuyers out of the market, lower the home ownership rate and raise the cost of shelter.
From 2012 to 2014, according to RealtyTrac, U.S. median weekly wages grew just 1.3% while U.S. median home prices grew 17.31%.
Create Wealth Disparity
Higher home prices create wealth disparity between home owners and non homeowners. Homeowners get richer merely by occupying homes while renters don’t obtain the same passive benefits.
Homeowners also gain access to cheap credit not available to renters in the form of low interest home equity loans. And don’t forget the mortgage interest deduction for home owners.
Cause Property Taxes to Rise
Because property taxes are based on home values, rising home prices lead municipalities to increase property taxes. For homeowners whose economic circumstances have not improved other than experiencing an increase in the price of their homes, increased property taxes put an added strain on their finances.
I suppose they can always take out a home equity loan to pay their higher property taxes.
Higher home prices can also lead municipalities to make overly optimistic projections on future tax revenues and to misallocate and/or over spend based on the (perhaps false) prospect of future increased tax revenue.
The whipsaw in housing prices over the past ten years (dramatically higher, then lower then higher again) creates an immobile work force whose fortunes and mobility are tied to the values of their homes.
Often homeowners remain in areas where their job prospects are dim because their home equity is underwater from the last housing bubble/bust or can’t move to where they may get a job because housing prices are too expensive in those markets.
An immobile work force hinders economic recovery that would otherwise take place.
Higher Estate Taxes May Result in Home Forfeiture
Higher home valuations may increase the total assets of an estate subjecting the inheritors to hefty estate taxes that may require them to sell the family house to pay the taxes.
Are Bad For the Real Estate Industry
While higher home prices lead to higher commissions, Fed driven home price appreciation also leads to investor speculation in the housing market making it susceptible to booms and busts. During the busts few homes are sold. This leads to a feast or famine market for real estate agents that doesn’t allow them a level of predictability of income or investment.
The Fed’s manipulation of the economy by driving rates down to get people to move in an out of houses is as foolish as paying people to dig ditches and then paying others to fill them up. Nothing of lasting structural value is produced in either example.
This artificially manipulated game of real estate musical chairs works until the music stops.
A housing inventory shortage is not the same as a housing shortage. We have a temporary inventory shortage not a permanent housing shortage. Inventory will become available just as demand drops due to a weak economy and rising interest rates. When that happens, this housing bubblet will burst.
Its foolish for the Fed to think that housing can drive an economy and to set policy designed to create a housing bubble. The housing market should be reflective of the strength of the economy not the driver of it.
We saw what happened in 2008 after we had massive nationwide rise in prices and subsequent massive decline.
Still want higher home prices? Careful what you wish for…
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*Ben Bernanke was Chairman of President George W. Bush’s Council of Economic Advisers from June 2005-January 2006 prior to being named as Chairman of the Federal Reserve in January of 2006.
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