A new housing bubble initiated

A new real estate and mortgage bubble is on the way, fueled by the record FED's money print and low interest rates. The steep increase in refinancing operations looks good for home owners as they will pay less in future for their loans. In a short time period this looks as a successful policy. But low interests are not only for refinancing operations, but also for new loans and for money used for other purchases. If you have $1000 for a monthly payment on mortgage, when the interest falls you will be able to buy a more expensive house. This will pump the home prices up. I.e. a new bubble will start.

Today's policy is not much different from the policy of the first decade of 21st century when low interest rates were a "decision" for every problem. Exactly this money print and artificial low rates inflated the previous bubble that finally exploded in a subprime mortgages catastrophe.

So is this the dream of Bernanke and Obama?

If you can borrow on 3,5% fixed rate, the question is who will save for this interest? Nobody. It is absolutely profitable to borrow and not to save. So where will come this money from?

Obviously from the FED's printing presses. I.e. not real - artificial money that will flood the market and create inflation. There is no easy way in economy. Every dollar must be created by hardworking and production. Every artificial dollar with no coverage leads to devaluation of the rest dollars - really created. This leads to a demotivation to work. People are stimulated to take loans and spend, and not to work for this money and only after that - spend it.

OK. People will refinance their mortgages and save some money every month. But this means they will either work less, or will consume more other goods with the same working for them. I.e. an imbalance will appear. And it will be compensated by an inflation - higher home prices or higher gas prices...

And we must also think about the next generation. Cheaper loans mean higher prices for the first time buyers. Young men with lower income will have to pay more for a home. And what will happen if one day the interests again start going up? With the new higher home prices this will lead to another bubble bursting.

If money were Gold (i.e. limited quantity) this could not happen. There would not be money for flooding the market and pressing the interests down. There would be no credit without savings against it. There would be no money without a real product created along with it.

But now - let's be happy of the new bubble bonanza. It is for us. The score at the end will also be for us...

Octobes 3rd 2012

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