It’s been just a few years since the near collapse of the financial system and the collapse of the housing market, and we now again have a stock bubble forming and housing prices edging their ways back to the old prices. Thanks to the Fed, who is once again pumping an insane amount of dollars to prop up all asset prices, we are entering the territory of the unknown.
The Feds knows that they are creating a bubble, but they are denying that it is the case. However, they are caught in their own trap. When they tried to talk about tapering back in May, mortgage rates spiked up and stocks fell. Mortgage REITS, which took in profit by borrowing short term and lending long term mortgages (S&L anyone?), fell precipitously and endangering the $400 billion industry. They are NOT going to be the one who’s going to hit the reset button. Rather, they are going to wait for the market to crash and then say “Hey guys, we had no idea it was a bubble,” repeating the same old Greenspan play.
What Could Happen?
Let’s just say, for the absolutely unlikely event that the Feds will taper, we will see an end to low interest rates in the mortgage market for sure. The private market is going to have to come back in and come back in strong. Someone is going to have to fill that $85 billion a month gap. And they are expected to get paid for the risks. Mortgage REITs that borrowed short and lend long will be forced to raise their rates as well or else their business will liquidate.
The housing market is going to take a big hit from the rise in the mortgage rates. Already, the May episode has already bumped mortgage interest rates up to a point where most homebuyers stopped paying for houses and homeowners stopped refinancing. The housing market has clearly slowed down the past several months and as of right now shows no signs of regaining the past momentum. Unless you are a hedge fund or an overseas investor loaded with cash, chances are most people cannot afford higher rates.
If demand goes away, prices will ultimately fall. If prices fall again, many homeowners will be tempted to default again. Even those who are now deciding to keep their house might just finally let go. We may see another collapse in the housing market again.
Knowing that, the Feds are not going to stop the purchasing. They are just kicking the can down the road to avoid the inevitable. There will always be talks about tapering. But I don’t think the Feds will be the ones doing it. The market will one day stop this madness but for now, the ideal play is still to lock in a home with reasonable rates of mortgage. The housing market may collapse again, but if you hold a 4.5% 30-year mortgage when the market rate is 7-8%, you’ve still hit the jackpot.
Photo Credit: Medill DC