The Impact of Fed Policy on Home Prices

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Tim Iacono is not exactly doing jumping jacks over the recent rise in home prices. He looks at the low mortgage rates driving home prices and he raises a bright red flag because he sees these prices as being distorted by Federal Reserve policy: 

While there are clearly other factors involved, it is the Federal Reserve’s asset purchase program that is largely responsible for these freakishly low rates (it is one of their stated policy objectives) and, while the central bank has promised to keep rates low for a long time and to continue buying mortgage-backed securities indefinitely, those actions are by no means guaranteed.

As shown above, even if mortgage rates moved back up to their 20-year average rate of 6.5 percent (what many thought were simply unbelievable rates when they first dropped that low last decade), that same $1,100 mortgage payment would finance a home purchase of just $193,000, not the current $279,000.

The difference between these two prices is nearly 50 percent!

Read How Fed Policy Distorts Home Prices here.

(hat tip Barry Ritholtz)


Posted 12-05-2012 1:08 PM by Graham Griffith
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