Tags: Expert | Fed | Housing | Bubble

Expert: Fed Creating New Housing Bubble

Wednesday, 10 Apr 2013 06:20 PM

By Doug Hulette

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The rebound in the housing market is "eerily familiar to the previous government policy-induced boom that went bust in 2006, and from which the country is still struggling to recover," says Edward Pinto, who was the chief credit officer at Fannie Mae from 1987 to 1989.

In an opinion article in The Wall Street Journal, Pinto notes that the Federal Reserve's aggressive policy of quantitative easing has lifted the stock market to record highs and supported strong bond prices. Moreover, he says, housing prices have jumped 8%, the biggest annual gain since 2006.

Pinto, now a resident fellow at the American Enterprise Institute, says that the market value of single-family homes has risen by more than $1 trillion. That "wealth effect" should empower homeowners to spend more, thus boosting the economy.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

But data from the Federal Housing Finance Agency suggest that the increase in house prices reflects that the Fed's lower rates are simply being capitalized into higher home prices, he says.

"While a housing recovery of sorts has developed, it is by no means a normal one," Pinto says. "The government continues to go to extraordinary lengths to prop up sales by guaranteeing nearly 90% of new mortgage debt, financing half of all home purchase mortgages to buyers with zero equity at closing, driving mortgage interest rates to the lowest level in 100 years, and turning the Fed into the world's largest buyer of new mortgage debt."

"Will history repeat? When it comes to interest rates, whatever goes down must go up," he says.

Talk of a housing bubble has been gathering steam. In an article Tuesday, the Washington Times reported that some analysts are questioning whether the market’s recovery is built to last. "Much of the pickup in sales and prices has been powered by investors who, convinced that the market is bottoming, are scooping up bountiful supplies of distressed and foreclosed properties at bargain prices and often paying with cash," the publication said.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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