Low interest rates certainly make housing an attractive asset class. After all, the 30-year fixed mortgage in the United States is around 3.50 percent, the 15-year fixed mortgage rate is 2.94 percent. These are all time low mortgage rates and many investors and potential home owners are trying to take advantage of these attractive interest rates. The Federal Reserve is also buying approximately $40 billion worth of mortgage backed securities to help inflate the housing sector.
As many of you know, in 2002 the Federal Reserve Bank cut the fed funds interest rate down to 1.00 percent. This rate cut by the central bank helped to bring mortgage rates down from 8.0 percent (2000) to roughly 5.8 percent in 2003 and 2004. This move by the central bank was done in order to stimulate the stocks and housing markets from the technology bubble and the 9-11 tragedy which sent the country into a severe recession.
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Well, the low interest rates worked for a while causing the United States to have a five year economic rebound. People in the United States went crazy buying and selling homes. Banks were lending money to anyone that could sign their name on the dotted line. No documented income loans soared as the house became the greatest investment to man. I remember going to a street carnival and seeing the real-estate booth with more people around it than the cotton candy stand. That was a sure sign of a top in housing, but it lasted longer than anyone could believe. Unfortunately, as we all know this housing bubble lead to the greatest credit crisis since the Great Depression. The stock markets plunged and many leading investment firms such as Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia, Merrill Lynch, Countrywide, and countless other firms either failed or were bought for pennies on the dollar. The taxpayer had to bailout most large banks and financial institutions so theoretically the entire financial system as we know it failed.
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Now the Federal Reserve (U.S. central bank) has lowered the fed funds interest rate down to zero percent. The rate has been this way since December 2008. The central banks have also implemented three quantitative easing programs (bond buying programs) since that time in order to inflate stock markets and to add liquidity to the financial system. In all fairness, the major stock indexes have mostly recovered all of the losses from the decline in 2008. Unfortunately, we all know that you can print money forever, and inflation is usually a byproduct of this so-called stimulus.
The housing market has been rebounding. Traders can simply look at a chart of the leading housing stocks and see how the sector has been a major winner since October 2011. Leading housing stocks such as Toll Brothers Inc (NYSE:TOL), Lennar Corp (NYSE:LEN), D R Horton Inc (NYSE:DHI), and KB Home (NYSE:KBH) have been some of the strongest stocks in the market recently. If this important and leading stock sector starts to give up its gains and go into correction it will be a sign that the major stock indexes will probably start to falter. The Federal Reserve is certainly trying to cause another housing boom. This will generally help companies such as Home Depot Inc (NYSE:HD), Lowe's Cos (NYSE:LOW), Sherwin-Williams Co (NYSE:SHW), Mohawk Industries Inc (NYSE:MHK) and many others. So sure, the central bank is definitely trying to keep the housing market strong. More construction workers will be needed and this added workforce trickles down to other sectors just as it did in 2003 through 2007.
Is there another housing bubble developing? No, there does not seem to be a housing bubble taking place this time around because the banks are doing their job, they are now only lending to qualified borrowers. Unfortunately, it takes a crisis for these financial institutions to do their job. So another housing bubble is unlikely, but a commodity and stock bubble is certainly more probable down the road.
Post by: Nick Santiago