I’ve been watching the markets and the economy recently and it seems to me that we’re gradually entering into another housing bubble. Why do I say this? I say that because the Federal Reserve has been doing everything they can to push the price of housing up. Alongside the media, who is constantly pushing the idea that now is the perfect time to buy a home. To current homeowners, especially those who were caught up in the housing bubble during the middle of last decade, this may sound like good thing. But… hold on. Let’s look at the entire picture before forming a final opinion.
Now that we’ve laid out our premise, let’s discuss exactly how the Fed is trying to create another housing bubble. It’s no secret that The Fed has announced that they intend to keep interest rates (the Fed Fund Rate) near zero until mid 2015. You’ve also heard that The Fed has ramped up their buying of MBS (Mortgage Backed Securities) by an additional $45 Billion dollars a month… totaling $85 Billion dollars (QE4). What that does is pump more liquidity into the markets and removes a lot of the bad debt that was left over after the last housing bubble burst. In turn, this allows lenders to lend more freely since it’s cheap for them to borrow as well. With those factors in play, the idea they’ve been pushing is housing! If people can be persuaded to buy homes, that would create a high demand for homes. As demand increases and supply diminishes, that of course causes home prices to go up.
But, you may be wondering… Why even create a housing bubble? Other sectors of the economy have been slowly picking up, but housing has lagged behind everything else. Its pretty difficult to create a robust economy if housing is sluggish. Let’s face it — a booming housing market creates millions of jobs and creates lots of cash flow. Developers have to hire construction workers, then the developer has to purchase the needed materials to build homes. Then Real Estate Agents are hired to get the properties sold. Once the homes are sold, families then decorate their homes with furniture, appliances, etc. So as you can see, there’s a lot of money to be made if the housing market were booming.
At this point, you should understand why the government and the Fed would love to see a strong housing market. But that now raises the question: Would the method the Fed is employing to create a strong housing market inevitably lead to another housing bubble? While you ask yourself that question, also bear in mind that the global financial system still hasn’t recovered from the bursting of the first housing bubble in 2008. Since the global financial system hasn’t recovered from the first bubble, how is it going to affect us WHEN this next bubble burst? What’s interesting is that we’d be dealing with two bubbles at the same time. We currently have what I call the “Treasury Bubble.” I’m referring to the government borrowing money at a rapid rate and of course handing over treasuries (I.O.U’s) in exchange. Whenever you hear about stimulus/QE/Operation Twist/etc., that’s another part of the Treasury Bubble. I don’t mean to sound like a doomsayer, but what happens when BOTH bubbles burst? That’s the big question.
But there will be some consumers that will be winners in the end. When the housing bubble burst in 2008 and the real estate market bottomed out between mid 2009 – early 2010, that was a great time to buy a house (or any type of real estate) since prices were so depressed. People were desperate to sell even if they had to do so at a lost. If a person bought a home during that period, and happens to ride the wave of the inflated housing market that seems to be developing, that person would likely reap great benefits if they play their cards right. What consumers are going to lose? Those that buy homes after the bubble has been well established. Meaning, they bought at the top of the market, when prices are bound to start the correction period and drop drastically at any moment… just like the people who lost in the previous housing bubble.
Conclusion: The Fed and the government, in my opinion, are under intense pressure to do something to get the economy running at full speed again. The only method they know to use are inflationary methods that create what we know as the boom and bust cycle. Economic bubbles are created (boom) and when the bubbles burst (bust), we end up in deep recessions. I have no doubt that we will experience the same thing this go round as well. As any student of real economics know, inflating your way out of economic trouble could only lead to disastrous results. I’d suggest you pay attention to the market, ride the trend, essentially taking full advantage of what’s going to occur and then get out before things turn sour.