![]() ![]() The current estimated housing shortage stands at around 5.5 to 6 million in-demand homes. There are too many people and not enough homes. Low interest rates have created a diversion, and adequate attention hasn’t been given to just how big the demand for housing is. Unfortunately, there is more at play, and the Fed may not have as much power in the market as it would seem. That would put everything back to normal, right? ![]() So, the question becomes: If we are experiencing a housing bubble with prices rising like crazy because of low interest rates, couldn’t the Fed sell all of its mortgage-backed securities? Rates would go back up, prices would stop rising and the money supply would return to $4 trillion. And we all know that the higher the interest rates, the tighter our budgets become. When there is less cash available in the market, it becomes more expensive to borrow and interest rates should go up (interest rates being the price of money). In turn, the money the Fed gets for each sale essentially gets “burned.” Opportunistic investors buy the assets and, thus, have less cash. ![]() To reduce the amount of money in circulation, the Fed will need to sell its acquired assets at a discount. Taking money out of the economy to control prices is a little more complicated. ![]() InvestorPlace readers that are new subscribers to the The Lead-Lag Report can receive a 30% discount by entering the promo code “InvestorPlace30” with your order.The Fed currently holds $2.5 trillion in mortgage-backed securities and has a steady appetite for buying nearly $120 billion in mortgage and bond securities each month. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines. On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. This could be the driving factor that finally pulls the economy into recession in the near future. In fact, it’s likely already started and there’s a lot of evidence supporting it. Right now, I’m seeing conditions that favor a major pullback in the housing market. When it’s struggling, it tends to pull everything down with it. Housing is one of the cornerstones of the U.S. Part of this is due to higher mortgage rates and soaring home prices, but both are reasons why the housing market could be facing a significant repricing. They’ve experienced a sharp decline in a way that’s not all that dissimilar to the financial crisis. Despite strong wage growth and a historically low unemployment rate, look at what’s happened to home sales. If the economy is in good shape and consumers feel good about their jobs, income and savings, they’re much more willing to consider upgrading to a larger, better or more expensive home. Home prices are a direct reflection of activity within the housing market. Let’s take a look at some of the evidence pointing to a potential housing market crash. Home prices are already on the decline, especially along the West Coast, but several key indicators suggest that an even larger housing crash may be nearing. Lumber prices are a direct tell on home construction, industry demand and, ultimately, home prices. The average home has about 16,000 board feet of lumber. It’s the cornerstone of one of my primary market risk signals precisely because of what it tells us about the housing market. Even looking at how much is being spent on home appliances and furnishings can provide a good idea of how much the consumer is spending. For example, the number of mortgage applications can indicate how many buyers and sellers there are in the market. Home values are perhaps the most visible sign of how the housing market is doing, but there are a number of variables you can look at to assess the market’s overall health. The housing market is one of the key tells on the overall health of the economy. ![]()
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