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
As the Federal Reserve, and central banks around the world, continue to create money on an unprecedented scale, asset bubbles have formed in a number of markets. But as the money creation continues, those quantitative easing efforts run into one of economics’ age-old principles: scarcity. Man’s desires are unlimited, but the number of goods that can satisfy those desires is finite. Printing money does not increase the number of goods in existence, it just increases the amount of money chasing the existing stock of goods. And not only are goods finite, but also the number of markets in which those goods can be exchanged.