Fed Official: Watch Out for the New Housing Bubble

With home prices posting record growth over the past year but incomes remaining essentially flat, one Federal Reserve official is warning that a new housing bubble is brewing, threatening to pop in the near future.

“I’m beginning to see signs not just in my district but across the country that we are entering, once again, a housing bubble,” Dallas Fed President Richard Fisher told reporters. “So that leads me … to be very cautious about our mortgage-backed securities purchase program.”

The jump in home prices is partly the fault of the Fed, according to Dallas Fed President Richard Fisher, a result of those voluminous mortgage-backed bonds purchases in order to keep mortgage interest rates low. The Fed has been buying up $85 billion in assets each month, $40 billion of which are mortgage-backed. If there wasn’t such a huge demand for mortgage bonds, banks wouldn’t able to offer such low rates. If rates were not artificially low, prices would not be climbing so high.

And there’s some validity to his point. When mortgage rates spiked back in June after the Fed hinted it would start tapering its bond-buying program, mortgage applications dropped off dramatically and the bidding wars going on in some areas ceased.

“We have to be watchful and realize there has historically been an era of the Fed over-stimulating” since the Great Depression, Fisher said. “I worry we are following that tradition now. “No one knows when the bubble pops. But I would argue that … with each dollar we buy in Treasuries and mortgage-backed securities, we’re getting closer to the tipping point.”

Interestingly, Fisher says he will still support the bond-buying program at the Fed’s next meeting despite his misgivings. “Given all this uncertainty it would be hard for me even to argue a change in course of monetary policy,” he said. “I don’t like the course we’re on… but my view will be to stay the course at the next meeting.”

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