Reports say that the housing market is unsustainable. The reasons why are not as clear as the catchy headlines.

The logic behind the statements aren’t as obvious as you might think.

This article will give you insight on how to identify the root causes. The framework of this article is as follows:
  1. The government creates securities and buy them with invented money. This cannot continue infinitely.
  2. The created money from bond/security sales has seemingly caused increased inflation (rate of inflation). One of the main causes of inflation is an increased supply of money in the economy.
  3. The government has to stop inventing money. Therefore, they can no longer keep mortgage interest rates low. Increased mortgage rates should start reducing the demand on homes (starting at the higher priced tier).

First we need to examine why the Fed (read goverment monetary policy) has chosen to stimulate the economy.

I believe that the recent years of uncertainty and fear has led the goverment to stimulate the economy by inventing (physically printing and otherwise) currency.

The government trades the newly invented money to the treasury for bonds or treasurys.

  • The treasury trades cash for an IOU (debt to repay at various lengths of time).
  • The yeild of the bonds that they purchase (specifically the 10 year treasury) influences what conventional fixed rate mortgages are priced at.
When the government stops or slows the rate at which they purchase bonds, the yield goes up (explanation for another time) and therefore so do the interest rates for mortgages.

 

Interest rates are now going UP ⬆️

Reasons for housing demand to remain strong are:

  • Cash buyers in the market who are not subject to what a bank would limit them to
  • Raw demand of supposed new households that will be seeking housing now and in the near future

The lower interest rates have allowed the amount that one could purchase to rise and now that interest rates are rising, there will be pressure on home purchase prices. Specifically on the higher end of values/prices.

 

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