I’m shocked at how ignorant the financial press is. They are reporting on the rising housing prices without seeing the connection with what the Federal Reserve is doing with QE3, or as some are calling it QE Infinity.
Federal Reserve QE Infinity
Here is what the Fed is doing and why you should be wary about being happy about the rising housing prices. QE Infinity is where the Fed is pledging to inject up to $40 billion worth of paper money into the system every month until there are significant improvements in unemployment.
What does that mean? That means they will probably be doing this for the next couple of years, at least.
How are they injecting this cash? They are doing it by buying up mortgage securities.
Record Low Interest Rates on Mortgages
If you’ve asked anyone that has shopped for a mortgage lately, you will find out that interest rates are super low. I just talked to someone who refinanced their house at 3 That’s like close to inflation rates.
What affect is this going to have? It is going to make it much easier for people to get mortgages and buy homes. It will also incentivize people to buy a second home. Even if you are wealthy, you will take advantage of this time to buy up properties because we all know interest rates won’t always be this low.
Reason Housing Prices are Rising
There in lies the REAL reason housing prices are going up. It’s not because the economy is getting better, because it’s not. It’s not because people are feeling confident about their financial futures.
It is because people are taking out low interest loans.
Fed Creating Another Bubble
The Fed’s easy money policies have created many of the previous bubbles, which all eventually burst. It happened in 1987 and it happened again in 2000 in the tech bubble.
Interestingly enough, it happened again in 2008 when housing prices plummeted and homeowners were underwater with their mortgages that they could not afford.
Here’s my point, you cannot keep printing money and expect there not to be a bubble. All bubbles go bust. You can ask my 2 year old and she will tell you that. The Fed here is creating another one.
Short-Term Investing Strategy
Here is what I would not do right now. I would not buy a house, even if the mortgage rates are low. If I already owned a house, I would refinance right now. But make sure it’s not an ARM – adjustable rate mortgage.
Also, I would go long the house builders like KB Homes and the like. They will make a killing in the next couple of years. But again, they will go bust when this bubble bursts again.
David is the Managing Editor of Finance World Online. You can find him at http://financeworldonline.net.