Source: Speculators Anonymous —
Many longtime readers know that I’ve been very critical of the housing market after the massive boom in real estate prices post-COVID.
And as we learned from the underrated Austrian economist – Ludwig Von Mises – the bigger the boom; the bigger the bust.
Thus – after an extraordinary rise in the housing market post-2020 – I believe the housing market’s more fragile than many expect as market liquidity disappears. And will have wide-ranging ripple-effects throughout the economy.
Let me explain. . .
There are two main reasons for this recent housing boom.
And that is greater housing demand spurred by easing from the Federal Reserve. And the decline in supply due to diminishing home building and government policies.
This combination of more demand with falling supply is the backdrop for rising prices.
And over the last twenty-plus years, this correlation has held true.
Just take a look at the chart showing the difference between home price changes and monthly supply of homes on the market. . .
Thus the sudden surge in prices after 2020 shouldn’t come as any surprise.
Because the Fed spurred demand artificially higher – by cutting interest rates, buying mortgage-backed securities (MBS), etc. All-while the U.S. government curbed supply – by restricting homebuilding, pausing mortgage payments, suspending foreclosures, etc.
And while many of these issues created severe distortions in an already tight housing market over the years (especially the home-building restrictions in major cities that have kept prices artificially high). I believe the Fed’s mortgage-bond buying was the most inflammatory.
That’s because the Fed’s short-sighted policy of buying MBS’s poured gasoline on an already hot housing market.
To put this into context: the Fed bought over $1.5 trillion mortgage bonds in the two years after COVID began. Now MBS’s make up roughly one-third of the Fed’s entire balance sheet.