Housing is booming, right?

MBST, monthly, 2002 to 2013, $M

Wrong. The Fed is buying. But let’s look deeper: the latest news on US housing was promising, with prices gaining some 9.3% YOY in 20 cities. An old expression claims as housing goes so goes the US economy so what’s not to like about this picture?

Unfortunately, much of this growth is being driven by direct intervention of the US Federal Reserve in the private mortgage market, specifically by purchases of mortgage backed securities. Last week alone The Fed purchased $13.1B of MBS’, and has been using cash flow generated by these securities to purchase additional MBS’. These interventions have the effect of artificially lowering mortgage rates thus artificially increasing demand. Do these lower rates reflect the true risk / reward profile that lending institutions strive for when offering mortgages? I don’t think so and the bank’s themselves DON’T HAVE TO WORRY, as they have a ready guarantor – The Federal Reserve – who purchases some $40B a month of the all the MBS’ they can create. The chart above shows the scale of The Fed’s intervention meddling. The black line, MBST, shows the dollar value of the securities held by The Fed. From $0 before 2009 they’ve added over $1T of MBS’ in a very short period of time. And even more worrying – since November 2011 after beginning to wind down their positions they once again started adding. Why? You’ve got to wonder.

So yes, its no wonder housing is booming. To the point that some folks are openly speculating about another US housing bubble.

Almost anytime governments interfere in the markets we end up with imbalances.

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