The American Enterprise Institute is taking the Federal Reserve to task for its bubble-blowing monetary policy. The AEI’ latest report on housing market indicators is a wonderful composition detailing how Federal Reserve monetary policy has fueled massive home price appreciation and speculation in the the U.S. housing market. It’s refreshing to see that others calling the Powell Fed out for blatantly obvious asset price distortions. With Powell continuing the denial and misdirection, the problems are likely to get worse before they get better.

I would encourage you to read the entire AEI Housing Center report in full, but here are a few key takeaways.

“Driven by the lowest mortgage rates in history, counts for all loan purposes were at or near series’ highs in October 2020. No cash out and cash out refinances are blowing past their prior highs.”

“The Fed’s monetary punchbowl is fueling rampant home price appreciation and is misdiagnosing the impact on the housing market.”

“The GSEs use of appraisal waivers has exploded since mid-2019… Appraisal waivers now account for 46% of all valuations.”

“Since the top 40 metros have HPA increases of 6% to 14%, affordability continues to worsen, even in places that used to be more affordable.”

The AEI is correct to point out Powell’s ridiculous narrative that the huge ramp in home prices is a one-time passing phenomenon. As the AEI explains, FOMC officials are discounting the arbitrage opportunities created by Work From Home (WFH), zoning and other factors constraining supply. We have seen how downtown city centers have been hollowed out while cheaper suburban properties get bid to the moon despite obvious flaws and deficiencies. The AEI directly questions the need for the Federal Reserve’s continued purchase of agency MBS. It’s no secret that record low mortgage rates have fueled the massive ramp in U.S. home prices. So why is the Fed still eating the mortgage market?

Home Price Appreciation vs Mortgage Rates

As the AEI notes, it is the lower priced tiers for housing where home price inflation has hit hardest. These buyers are the most likely to lever up to make a home purchase, meaning they are exposed to more risk when home prices eventually correct. It doesn’t take a rocket scientist to calculate the potential damage when you have home buyers reaching for inflated prices with marginal or even zero skin in the game.

Just imagine all those GameStop bagholders after bidding shares to the moon in a speculative frenzy, and apply the same analogy to the housing market. It’s really no different. There are just happen to be a few more layers of regulation and insulation in the housing market. When those regulations break down, bad things happen. We should have learned this from the last housing crash in 2008, but apparently not.

When prices are determined at the margin, it’s easy to see a big ramp higher when you have the Federal Reserve distorting the markets beyond all recognition. By pouring $trillions in new liquidity into the system in a trickle-down love fest for the wealthy and well-connected the Fed has made the U.S. housing market virtually unrecognizable. The real estate and mortgage industry have been too happy to play along. The huge spike in appraisal waivers is a particular cause for concern considering how prices are formed at the margin. With valuation checks getting tossed to the wind, there is little to prevent prices from increasing even more.

Appraisal Waivers Explode

This is what is happening as buyers across the country bid up home prices in a fear of missing out (FOMO). There is too much speculative frenzy chasing a shrinking pool of inventory. Inventory remains at record lows across the Dallas-Fort Worth metro area, with several counties sitting on less than a month of existing home supply.

Existing Home Supply

It’s going to be an interesting spring in the housing market. The Federal Reserve is still throwing caution to the wind in an attempt to generate more inflation. At the same time, Fed officials are completely ignoring massive speculation in the markets and double-digit home price appreciation which is staring them in the face. It is becoming increasingly obvious that central bankers, including those at the Federal Reserve, have no shame. Multi-millionaires like Jerome Powell and his FOMC friends will be largely insulated from the economic fallout of their failures. Most of the American public will not.

Fed Assets and Mortgage-Backed Securities Jan 2021

The new administration is still floating a potential homebuyer tax credit as part of a larger stimulus package. Additional stimulus in the current housing environment could be the equivalent of throwing gasoline onto a burning building. That being said, government officials are prone to juicing the housing market regardless of the longer-term consequences. The lords of finance want to keep the credit growth flowing. Any reversal of that credit growth spells economic disaster. That was one of the most important lessons of the Great Recession. Despite any of the myriad warning signs clearly visible for everyone to see, Wall Street will fan the flames until the house comes crashing down.

Debt Securities and Loans Jan 2021