Image: Adam Cohn
The Fed’s unprecented monetary easing in the aftermath of the financial crisis has led to bubbles forming all throughout the economy. And while the housing market hasn’t been quite as overheated as it was before the financial crisis, there is always the risk that a new housing bubble could form. In an era of near-zero interest rates, there aren’t a lot of good options for those seeking a return. As other markets become saturated with investors and bubbles in other sectors start to grow or burst, more money will flow back into the housing market, looking either to buy houses or lend to buyers.
According to a Federal Reserve survey, banks eased lending standards for home mortgages and auto loans in the fourth quarter of 2015. Even though the easing was supposedly only slight, will this become a continuing trend over the course of the year? Will we have to worry about returning to the bad old days of subprime NINJA loans? Then there’s the news that homeowners are once again beginning to draw on the equity in their houses as a source of cash. The numbers are nowhere near their pre-crisis highs, but if this trend continues it could portend a growing housing bubble. As prices are stimulated higher through more money pouring into the housing market, you would expect more and more people to treat their houses as ATMs once again. These are just two possible indicators of a developing housing bubble, so we’ll remain on the lookout for others.
Image: David Chao
You know that the economy has reached peak bubble when you start combining two bubble categories: house flipping and tech startups. Queue startup Opendoor, which has been in the news recently. It’s a startup that looks to buy homes quickly, then flip them for a profit. It’s more or less a “Cash For Houses” business, except that it does its business over the Internet. The business has raised a fair amount of money, and apparently has a line of credit sufficient to enable it to buy a fair number of houses. Opendoor thinks it can make a profit by buying houses that are undervalued and flipping them quickly to other buyers, but it is operating in a market whose prices are completely distorted by and dependent on central bank monetary policy. With so much easy money having been pumped into the financial system, everything looks like a sure bet. But when the Fed begins to really tighten policy, will Opendoor still be able to operate? When the Fed tightens, housing prices will begin to sink again and Opendoor will undoubtedly face difficulties in finding buyers for the homes it purchases at the prices it expects. As losses mount, its line of credit may shrink or even disappear. Like many other tech startups that have found easy going in the past seven years of easy money, Opendoor will likely find out the hard way that its business model is unsustainable without a steady boost of newly-created money from the Federal Reserve.
Image: Images by John “K”
A credit union in San Francisco is offering a $2 million, no down payment mortgage loan to borrowers. And while this is being offered by a credit union, credit unions of necessity being more cautious lenders than banks, and the credit union will no doubt vet potential borrowers very carefully, what could be more indicative of a bubble than a no down payment, adjustable rate jumbo loan? Sure, this may not be a NINJA loan, but it’s being offered because of the huge amount of easy money pumped into the financial system by the Federal Reserve.
The day after her FOMC press conference, Federal Reserve Chairman Janet Yellen gave a speech at a conference via prerecorded video on the topic of “The Importance of Asset Building for Low and Middle Income Households.” According to Yellen, “A larger lesson from the financial crisis, of course, is how important it is to promote asset-building, including saving for a rainy day, as protection from the ups and downs of the economy.” That’s all well and good, but whose asset-building is the Federal Reserve promoting with its trillions of dollars of quantitative easing? Surely the Fed doesn’t think that shoveling trillions of dollars of new money to Wall Street is helping the average American family?