Real Estate Bubbles

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We had a real estate bubble, driven by cheap money and easy lending, and we all know how it ended in the US. The solution to get us out of the mess caused by cheap money and easy lending is harder underwriting, but still cheap money. 

Another real estate bubble is forming; however, this time I do not think the government has the tools to fix it and it is going to get a lot uglier than the last one. 

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The government has guaranteed mortgage debt, so that buying 30-year bonds backed by mortgages is roughly the economic equivalent of buying a 30-year treasury bond. My issue is the government is also selling bonds (US debt) and they have a limited amount of money to make the payments on their debt. 

To stop the next housing bubble, the government has to raise rates. Easy, right? However, for every 1% the government raises rates of mortgages they also raise their own borrowing costs by 1%, or roughly $160 billion per year. That’s on the debt alone and does not include the added costs of the unfunded liabilities linked to borrowing costs. 

If you think 7% or 5% vs. 3.5% is a better interest rate for home loans, you had better get ready for the government cost of borrowing to jump where it cannot make those payments. Structurally, at 7% I think the SS trust fund is going to be bankrupt a lot quicker than anyone can imagine and the government cannot afford it. I do not see the issues getting fixed.

I think the government will keep a cheap money policy for the next 2 – 20 years and it looks like we are going to get an inflationary recovery…. Home values are going to go crazy, inflation will be here to stay and mortgage rates will stay low.

At some point, the US government will be forced to raise rates or the market will do it for them. I fail to see the US government being able to keep interest rates below the rate of inflation for any extended period of time.

Good times.   

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