The Housing Market Is on Fire. The Fed Is Stoking the Flames.

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Driving with one foot on the brake and the other pressing the gas pedal to the floor. That describes the housing market, with the Federal Reserve pumping fuel into the system while supply and affordability constraints slow things down. At the very least, this is costly; at worst, it risks serious overheating and a breakdown.

Soaring house prices these days get play on general television news and the front pages of newspapers, not just the business section. The story has progressed from one about the exodus from cities under lockdown from the Covid-19 pandemic, setting off a scramble that has pushed up prices of existing homes by 23% in a year. Now, shortages of building materials, land, and labor have worsened the squeeze, potentially braking home construction.

Throughout the saga, the Fed has provided tanker cars of liquidity, by slashing its short-term interest rate target to near zero and by buying $120 billion of securities per month since…

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