The Fed Has Purchased 1.43 Million Homes Worth of Mortgages

Though Silver Circle was written prior to the launch of the Federal Reserve’s risky and untested quantitative easing scheme, through which the central bank has been buying billions worth of mortgage-backed securities each month, the film’s plot ultimately predicted that the Fed would get involved directly in the housing market. In the fictional dystopian future proposed by Silver Circle, the Fed’s Department of Housing Stability seizes homes in an effort to control property values, absorbing them into the inventory of the Strategic Housing Reserve.

Meanwhile, in real life, Federal Reserve Chairman Ben Bernanke has implemented a strikingly similar policy through quantitative easing. According to analysis presented over at Cliff Kule’s Notes, the Federal Reserve has spent enough on mortgage-backed securities since September of 2012 to have purchased 1.43 million homes outright, considering the current average price of a home in the US. Its relentless bond buying program has artificially inflated the demand for otherwise valueless mortgages by 130,000 homes per month. Let’s discuss this looming disaster that hangs over the US housing market.

False Demand Encourages Investors to Make Mistakes

Since the Federal Reserve is buying so many mortgages with fake fiat funds, home prices are being held up artificially. The crash of 2007 was an effort by the market to drive housing prices back down to levels that cash-strapped Americans can afford. Instead, the Fed has worked via the quantitative easing program to push home values back up to unnatural levels, which are only affordable primarily by banks and investors, rather than families.

Meanwhile, My Budget 360 points out that young adult household formation has dropped precipitously in recent years, as young adults, the demographic hardest hit by the jobs crisis, are continuing to live with family members much later in life, rather than buying homes. This is yet another bad sign for the housing market. However, this problem seems tied to the jobs crisis, so there could be an uptick in demand in future years if the market is someday allowed to clear out all of this malinvestment and toxic debt.

Bernanke Is Creating a Double-Dip Housing Crisis

If the government had taken no action after the housing crash, home prices would have dropped substantially. For cash-strapped, lower income families, this would have brought the dream of home ownership within reach. After all, it’s not exactly a problem for there to be too many houses available at dirt-cheap prices. By holding their values up at unnatural levels to protect the speculative investments of a small number of Americans, the Fed has caused many of these extra homes to go vacant and remain empty, largely under bank ownership.

Currently, despite record-low interest rates and the Fed’s willingness to purchase around 130,000 homes per month worth of mortgages, the housing market is still barely sputtering along with poor long-term fundamentals. What will happen when these bond purchases cease? What will happen to the worthless mortgages owned by the Fed? What will happen when interest rates rise again and credit markets freeze up on families and small businesses?

Once again, the Federal Reserve’s misguided efforts to stabilize home values have set us up for another major housing crisis.

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