Source – lewrockwell.com
- “…It’s not out of the realm of possibility to imagine that by the end of this year we could see interest rates on mortgages rising to 8% or even higher…And the damage that does to the housing market could be severe. Housing prices could plummet significantly if the Fed sticks to its tightening plan, and we could see a repeat of 2008, albeit with a twist. Many recent purchasers could find themselves underwater very quickly. Might we see a repeat of 2008, with millions of homeowners walking away from their underwater mortgages?”
SM: …Americans are rank amateurs compared to the enormity of the housing bubble still festering in the ‘Great White North’. Canada’s 38 mill. occupants, occupying the second largest land-mass on the planet, are tightly compressed along a 100 km. linear corridor, running parallel to the US border. As the vastness of its national territory sit essentially uninhabited, Canadians claw over each other to one-up the other on a million dollar rat-shack. It is a Pavlovian exercise in mass psychosis, whereby a god-blessed paradise is systematically turned into a macro-version of Gaza.
The past two years have made more and more people aware of the existence of the “everything bubble” that has slowly built up in this country over the past decade or so. One of those bubbles is a housing bubble that, despite the denials of some, could end up bursting soon.
If you’ve read anything by those involved in the real estate industry, you’ve probably heard things like, “this isn’t like the pre-2008 housing bubble”, “underwriting standards are better”, “the housing market is stronger”, or “this is solely a supply and demand issue.” But those distract from the reality in markets.
Yes, there may be issues with supply and demand, with lower housing supply and increased demand helping boost prices. Yes, there may be more all-cash buyers, including real estate investors, buying houses and boosting prices. And yes, there may be more people from California, New York, and other high-priced states trying to cash out and buy houses where it’s more affordable, driving up costs elsewhere.
But all those excuses only explain THAT there are issues with supply and demand. They don’t explain WHY there are issues with supply and demand. And by doing so, they ignore the elephant in the room. The Federal Reserve’s Effect on the Economy.
There’s no denying that ever since the 2008 financial crisis, the Federal Reserve has been the dominant force in the economy. Having created over $8 trillion out of thin air since 2008, the past 14 years have seen money creation on a scale that previous generations have never experienced.
We’re seeing many of the effects of this radical monetary policy right now, in the form of both asset bubbles and higher prices. As inflation spirals out of control, the Fed is pledging to do something, but will it be too little, too late?
One area in which the Fed has had an outsized influence is in the housing market. Remember that the Fed intervened in 2008 to help stabilize the housing market by purchasing mortgage-backed securities. It has continued to buy mortgage-backed securities (MBS) since then, and now holds over $2.7 trillion in MBS on its balance sheet, equivalent to about 23% of all MBS in existence.
When you think about that, the housing market begins to make a lot more sense. In essence you have a single entity that has taken over nearly a quarter of the MBS market, making it a market maker when it comes to mortgage financing.
The Fed has created trillions of dollars out of thin air to purchase these mortgage-backed securities, essentially creating demand for MBS out of thin air too. Because of that artificial demand for MBS, there’s less demand at the time of mortgage origination to be strict about who you’re lending to. After all, if you have an entity guaranteeing that it will buy billions of dollars of MBS every month, you can offload your risk onto the Fed’s balance sheet without worryi
It’s this massive demand for MBS from the Fed that helped drive mortgage interest rates down below 3%, and which helped spike housing prices. These high prices and low interest rates are completely artificial, being spurred by the Fed’s MBS purchases.
What the Fed Is Doing Now
Now we’re facing a situation in which the Fed is going to raise its target federal funds rate and decrease the size of its balance sheet, ostensibly by selling off MBS and either selling off Treasury securities or allowing them to roll off as they mature. What will happen to the mortgage market and to the housing market now that the Fed is threatening to tighten its monetary policy?
Mortgage rates have skyrocketed, rising over 200 basis points after only a 25 basis point Fed rate increase. Of course, it wasn’t so much the rate increase that helped drive mortgage rates up as much as it was the Fed’s decision to stop purchasing MBS.
Now that there’s no longer that artificially high demand for MBS from the Fed, mortgage markets have to actually reply to real supply and demand from actual investors. And that is what has helped drive mortgage interest rates skyward.
What happens if the Fed decides to push interest rates higher even faster than it has? What if it goes through with an expected sale of up to $35 billion in MBS each month? That would add something like 10-15% to the MBS supply available to markets each month. With that kind of extra supply, you would have to imagine that MBS prices would drop and interest rates would increase.
It’s not out of the realm of possibility to imagine that by the end of this year we could see interest rates on mortgages rising to 8% or even higher. Unless prices come down significantly, younger Americans who already doubted their ability to ever afford a house may find themselves even further behind the eight ball. And the damage that does to the housing market could be severe.
Housing prices could plummet significantly if the Fed sticks to its tightening plan, and we could see a repeat of 2008, albeit with a twist. Many recent purchasers could find themselves underwater very quickly. Might we see a repeat of 2008, with millions of homeowners walking away from their underwater mortgages?
The Fed is playing with fire here. It has backed itself into a very difficult situation, and no matter what it does it will do damage. If it continues with its loose monetary policy, inflation could spiral out of control. If it tightens, it could cause a recession to occur more quickly than it otherwise would have.
The obvious answer is to do nothing, suffer the consequences of what the Fed has done so far, and pick up the pieces from there. But institutional inertia and the pressure to “do something” will force the Fed’s hand, and with increasing pressure to fight inflation, what the Fed ends up doing could end up popping the housing bubble and proving to naysayers that there was a housing bubble all along.
How This Will Affect You
If you’re like many Americans, your largest single asset is your house. You’ve probably watched in amazement as the estimated value of your house has climbed in recent years. And maybe you were hoping to cash out, selling your house and moving elsewhere to downsize or live where things are more affordable.
If the Fed ends up doing something that tanks the real estate market, you could see your future plans go up in smoke. And if those actions result in a severe recession, particularly one that sees stock and bond markets lose as much money as they did in 2008, you could find that the other assets you were planning to rely on in retirement will be similarly affected.
That’s why it’s important to make a plan to protect your wealth and ensure that the assets you’ve built up to last you through retirement actually last you through retirement. If you’re nearing retirement age or are in early retirement, you can’t afford to lose 50% or more of the value of your investments just because the Fed tried to fix its mistakes. There’s no telling when or even if you might be able to recover from those types of losses if they were to occur today.
More and more Americans are turning to gold to protect their wealth in retirement, whether it’s by opening a gold IRA or buying gold coins to store at home. Gold’s ability to protect wealth through good times and bad is well known, and has become appreciated by ever more people.
With a gold IRA, you can own physical gold coins or bars while still enjoying the same tax advantages as a conventional IRA account. You can even fund your gold IRA by rolling over or transferring assets from a 401(k), 403(b), TSP, IRA, or similar account into a gold IRA tax-free.
Millions of Americans were in denial when the housing bubble burst in 2008. They kept hoping that markets would turn around, and watched despairingly as markets lost over half their value.
Don’t let that happen to your retirement savings if the Fed ends up popping this housing bubble. Contact the precious metals experts at Goldco today to learn more about how to protect your wealth with gold.