So here is the picture. The Fed is buying $40 billion in mortgage securities each month. With already super low interest rates money is now as available as sunshine in Colorado. One large bank president told us they really don't want more deposits as they have few places to lend it. Realogy opens at $27 a share and jumps 20% the first day on expectations of continued improvement in the housing market. Market after market reports that sales are significantly up this year, but almost everywhere the lack of inventory is now restraining sales.
Yet appraisals continue to stymie housing sales with the Federal government and FHFA constraining valuations. Multiple bids in markets across the country are common. Bidding wars are prevalent. More cash deals and more money down separate winners from losers. And the REAL Trends Housing Market Report in September shows that we are nearly to the "5" of households that signal we are back to a sustainable normal level of housing sales.
It is reminiscent of the Nixon wage and price controls of the early 1970's when the Federal government attempted to control inflation by controlling prices. It didn't work very well then as when they were lifted we had the worst inflation in the 20th century in the U.S. Now the Feds are controlling the prices of housing on the one hand and virtually begging consumers to borrow to buy a house. The Fed is obviously playing a game of attempting to drive housing prices up to restore the equity position of American homeowners. But how are they going to stop it once it really gets started?
And keep in mind that the abundance of cheap credit was a material contributor to the inflation in housing prices in the 1998-2006 period. It would appear that in addition to bailing out Wall Street the Fed has now moved on to do the same for Main Street. But how will they stop it once it gets started? That is a question lurking over the whole market right now.
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