Is Another Housing Bubble in the Works?

By pushing for a housing recovery with artificially low rates, the Federal Reserve could be contributing to future problems in the real-estate market

After the bursting of the biggest housing bubble in history, it’s incredible to think that we could repeat our past mistakes so quickly. But that’s just what might be happening.

Yale economist, Robert Shiller, when asked recently by Fox Business News if he thought a housing bubble was re-developing, said, “I think in cities like Phoenix and San Francisco, we might be seeing something pretty big developing. People there are very speculative-minded.”

By pushing for a housing recovery with artificially low rates, is the Federal Reserve contributing to another bubble? 

Across the nation, U.S. home prices have been edging higher and showed an average increase of 2.2% in May over April across 20 major cities, according to the S&P/Case-Shiller index. (See chart below)

Phoenix posted the best annual return and average home prices in the region were up 11.5% versus May 2011. It was one of the hardest-hit cities in the meltdown, and despite one-year gains, prices are still more than 50% below their June 2006 peak.

Home prices in San Francisco edged higher by 0.6% over the past year. The region has been helped by another technology boom – this time with mobile-application developers and social networkers. Workers flush with cash are bidding up home prices.  

Atlanta remains in the doldrums and is the only city to post double-digit negative annual return with -14.5%

For 30-year fixed mortgages, the average interest rate remains near historical lows and is 3.55%, according to Freddie Mac’s latest survey. The rate for 15-year loans is 2.83%.

Despite cheap credit, people are either skittish about the financial burden of home ownership or they can’t qualify for a loan.

What about all of the people with more home than equity? Compared to 2002, Americans’ home equity is 25% down or $2 trillion less today.

And although home prices may be rising, the velocity isn’t enough to allow underwater homeowners to refinance at today’s lower rates.

Since the beginning of the year, ETFs tied to the housing market, like the iShares Barclays MBS Bond ETF (MBB), are up by 1.92% while apartment REITs (REZ) have surged by 14.51%.

The iShares Dow Jones US Home Construction ETF (ITB) has rocketed ahead by 35.19% year-to-date on reductions in the supply of unsold newly built homes.

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