You Can’t Get There From Here
“The mind is its own place, and in itself can make a heaven of hell, a hell of heaven..”
― John Milton, Paradise Lost
As the real estate market gained steam earlier this year, a common anti bubble meme emerged- “this ain’t no bubble, home prices aren’t at their 2005-2006 levels”.
Now that interest rates are rising, the real estate market cheerleaders are at it again with a new meme:”interest rates are still lower now then when they were in 2005-2006″
Inherent in both these statements is the wishful thinking that real estate can continue to head higher because prices and interest rates are lower today than they were back in 2005/2006.
The 2005/2006 real estate peak isn’t the benchmark for which real estate must return.
The 2005-2006 peak in real estate was a fantasy bubble land mountain top driven by: cheap credit, lax lending standards, excessive issuance of AAA rated mortgage backed securities (MBS’s) that in reality were junk, and predatory lending.
The current housing bubblet is not driven by any of the above factors. It is driven by one factor – the Federal Reserve’s quantitative easing (QE) policy that involves printing trillions of dollars to purchase MBS’s and U.S. treasuries in an effort to keep interest rates low and to spur another housing bubble. As we have noted on this blog, housing prices have not headed higher in the past year because the economy was improving but solely because the Fed manipulated interest rates to artificial and historic lows.
Recently, the Fed has threatened to taper its QE program, giving as pretense the ongoing economic recovery that started with “green shoots” back in 2009.
The markets reacted by selling off bonds and driving interest rates higher. Rates are rising not because the economy is doing better, but rather from the realization that if the Fed stops its massive purchases of MBS’s and U.S. Treasuries there will not be be enough market demand for them to support their current prices.
As rates rise solely because the Fed threatens to taper (or actually does taper) its QE program, this mini-boomlet in real estate will quickly come to an end and the low inventory/high demand environment that drove real estate prices higher will reverse.
Of course if this were to happen the Fed would swiftly move to increase its QE program citing unforeseen weaknesses in the housing and/or employment markets.