Recovery of America’s Housing Market: Myths & Realities of the New Bubble

According to FHFA, conventional home-financing data for February 2012 to February 2013 shows that newly built & existing homes in 2013 sold for 9% & 15% more than during the previous year.

In turn, some economists believe that the addition of more than a trillion dollars in additional home value will spur a “wealth effect” to get consumers spending again.

Hey, this has gotta be good news.

But then, didn’t the NBER announce that the recovery officially began in June 2009. (Hmmm, it seems some people in the real world did not get that memo.)

Ok, let’s see if any of this makes sense. Consider that real incomes of American workers were nearly stagnant, rising by about 2% over past year & barely offsetting price inflation.

So, how could & why did home prices rise?

The simplest answer is found in monetary pumping, aka, quantitative easing (QE).

With mortgage rates on new & existing homes down by up to 1% compared to last year, monthly financing costs for new homes remained same & went up by 3% for existing homes.

And so the housing “recovery” has been conjured up with historically-low interest rates, guarantees on almost 90% of all new mortgage debt with 1/2 half of all home purchase made with no equity at closing. Meanwhile, the Fed is buying $40B in mortgage-backed securities each month (plus another $5B in Treasuries).

Anyone that thinks this sounds just like the last monetary & government policy housing boom/bubble; raise your hand!

And now remember that average mortgage rate during early 2000s were just over 6% while they now average less than 3.5%.

If mortgage rates were to go back to 6%, the US housing market cannot remain buoyant unless incomes rise by 1/3 or house prices fall by 25% or lending standards become even more lax.

Something tells me this cannot end well….

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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