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How the Fed has Destroyed the Housing Market

The housing report just came in, and it showed that mortgage applications rose, even though much of the country was forced into lockdown. For those who argue that the free market is no longer functioning the way it should, this stood as further proof that the Federal Reserve has more than just its finger on the scale. At this point, one could say that the Fed might have replaced the scale altogether.

This is the same sort of thinking that buys into the idea that debt does not matter – even though total public debt in the U.S. is now 106 percent of GDP. As such, the Fed has had almost free reign in recent months, first in the repo market where it was propping up the country’s largest banks and then in the broader markets where the Fed has been buying almost every ‘asset’ known to man.

What does this mean for the housing market? For starters, interest rates are being kept artificially low, and this props up housing prices. Second, the preponderance of free money has made it easier for developers to bring riskier projects to the market. Given the rate that the Fed has been intervening in the market, their work has destroyed the housing market. Still not convinced, well read on.

How Can Housing Prices Go Up During a Lockdown?

This has stumped many “experts” as many expected Armageddon in the housing market. While we are not out of the woods yet, mass unemployment and a spike in mortgage defaults and forbearance requests have spiked in recent months. Also, realtors are not considered essential, and this means that open houses and showings have shifted online – if they are happening at all.


Despite these headwinds, the National Association of Realtors reported that the median home price across the country rose on an annualized basis by 8 percent in March to $280,600. Even with softening demand, the number of homes on the market fell according to the initial data.

While this is an indication that sellers are holding off listing their homes, for now, it could also be an indication of other factors impacting the market, such as artificially low-interest rates. If this is the case, then the Fed’s meddling in the market is starting to distort pricing. Even though this might seem like a welcome development in the short-term, continuation of these policies will exacerbate the correction when the central bank runs out of money.

What Does This Mean?

For starters, this means that it becomes harder for average Americans to own a home as they are priced out the market. While Country Club Conservatives might welcome the inflation in property values, it does mean that the American dream walled off for millions of hardworking people.

The data backs this up as even historically low-interest rates have meant that homebuyers are spending more than ever before as a percentage of their income to pay for the home of their dreams.

But there is a trap as the government is not only the source of the problem but can be a potential solution – in that government needs to get itself out of the housing market. Doing so would restore some semblance of a free market instead of the Frankenstein housing market that has been brought on by years of overregulation and price-fixing. What is surprising is that Republicans in Washington fail to see that getting out of the way would help bring order back to the housing market.

What Can You Do?

Letting your Senators and Congressmen know that you want to Federal Reserve to butt out of the housing market is a good start. But in the end, the government can, and should, only do so much. As such, you need to educate yourself on the housing market and what makes sense for you and your family.

If you have disposable income, then this might mean watching the market in your area as an increase in foreclosures or a fall in prices might be a signal to acquire investment properties as we way to expand your retirement savings plan. If you are looking to sell your home, then now might be a good time as you could potentially arbitrage high home prices now to get the best price, while wait six-months for prices to fall when you are looking to buy a new home.

Also, older Americans might want to investigate reverse mortgages as we way to free up cash while housing prices remain high. This strategy would have you convert your traditional mortgage into a non-recourse mortgage that would allow you to cash out your equity without needing to repay the mortgage as long as you live in your home. If this is something you think might make sense, then you might want to check out this ARLO’s top 10 lenders here.

Remember, knowledge and reasoning are the bedrock of conservative principals. So, educate yourself on the market and find ways to make it work for you.

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