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.
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.
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.
