Does the Federal Reserve Want to Re-Inflate the Housing Bubble?

The latest “qualitative easing,” or QE3, has the Federal Reserve Bank purchasing a large amount of mortgage-backed securities every month.  The news, on its face, doesn’t seem too sinister.  As reported by the NYTimes:

“The Fed pledged to buy mortgage-backed securities at a pace of about $40 billion a month for an indefinite period of time. The effort is expected to increase prices and demand for those securities and push down mortgage rates, already near record lows. That might encourage more families to refinance their mortgages and others to purchase a home, with ripple effects through the real estate industry and the rest of the economy.

“Analysts said it might help strengthen and quicken a tentative housing recovery. In recent months, housing sales and, in some cases, sale prices have ticked up. Builders have broken ground on new projects.

“More than six years since the real estate bubble started to deflate, many housing analysts said, if cautiously, that they believed the worst was over.”

But wait a sec.  If the worst is over, and we’ve begun a presumably natural recovery, why are the feds stepping in to drive up housing values at a rate beyond what the economic fundamentals would otherwise support?  That sounds like efforts to re-inflate an asset bubble.  Is that really the answer?

On the other hand, that’s the long-term.  In the short term, it looks like real estate will be a “good investment” — just like the last time.  And you gotta live somewhere…..

Posted by Marc

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