The New Housing Bubble

A few days ago the Treasury announced that it was going to take several steps in order to manipulate lower rates on 30 year fixed rate mortgages. At the time, I was stunned and said in a short post that I would follow-up later on their plan. So let me do that briefly now.

If you accept the premise that the meltdown in housing has been one-not the only one-but one of the proximate causes of the current economic crisis it seems logical to ask why we would want to try and recreated the circumstances that led to housing’s implosion. That would seem to be the aim of the new program.

Exceptionally low interest rates promoted by the Fed together with faulty risk pricing caused a bonfire of speculation in the housing industry. Consumers logically saw no downside in the assumption of excessive mortgage indebtedness and bid up the price of housing. The new plan seems designed to bring about the same result. Restricted to new home purchases and not refinancing, the goal seems to be to reignite a fire under the market. To what end is left unstated.

No one doubts the economy needs stimulus and unconventional methods will probably need to be employed. But since we have to go through the process anyway why not try and put the pieces back together in a fashion that results in more sustainable long-term growth. We should be figuring out that bubbles don’t really work over the long haul.

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