US Housing Bubble v2.0

Posted by Tracy Alloway on Feb 01 10:02. 14 comments.

Here’s one thing that the Sigtarp’s quarterly report to Congress, released on Saturday, made very clear; propping up house prices is now an explicit goal of the US government.

So explicit in fact, that the Special Inspector General for the Troubled Asset Relief Program has knocked up this little chart to show how various policy programmes (Hamp, More…

Here’s one thing that the Sigtarp’s quarterly report to Congress, released on Saturday, made very clear: propping up house prices is now an explicit goal of the US government.

So explicit in fact, that the Special Inspector General for the Troubled Asset Relief Program has knocked up this little chart to show how various policy programmes (Hamp, MHA, etc.) lead to higher houseprices:

See? It’s like crystal.

As the report states:

Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.”

In general, housing obeys the laws of supply and demand: higher demand leads to higher prices. Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices. The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS. Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income.

Similarly, the Administration is boosting home prices by encouraging bank lending (such as through TARP) and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit. All of these actions increase the demand for homes, which increases home prices. In addition to direct Government activity, home prices can be lifted by general expectations among homebuyers of future price increases.

Questions related to moral hazard on a postcard to the below please.

The White House
1600 Pennsylvania Avenue, NW
Washington, DC 20500

The Federal Reserve
20th Street and Constitution Ave.
Washington, DC 20551

The Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Related links:
Serial bubbles – FT Alphaville
Hamp, what is it good for? – FT Alphaville
Interest rates and the housing bubble: less maestro, redux – FT Alphaville
Goldman says US gov’t boosted home prices by 5% – FT Alphaville