Tapering the Real Estate Market

It’s been just a few years since the near collapse of the financial system and the collapse of the housing market, and we now again have a stock bubble forming and housing prices edging their ways back to the old prices. Thanks to the Fed, who is once again pumping an insane amount of dollars to prop up all asset prices, we are entering the territory of the unknown.

The Feds knows that they are creating a bubble, but they are denying that it is the case. However, they are caught in their own trap. When they tried to talk about tapering back in May, mortgage rates spiked up and stocks fell. Mortgage REITS, which took in profit by borrowing short term and lending long term mortgages (S&L anyone?), fell precipitously and endangering the $400 billion industry. They are NOT going to be the one who’s going to hit the reset button. Rather, they are going to wait for the market to crash and then say “Hey guys, we had no idea it was a bubble,” repeating the same old Greenspan play.

What Could Happen?

Let’s just say, for the absolutely unlikely event that the Feds will taper, we will see an end to low interest rates in the mortgage market for sure. The private market is going to have to come back in and come back in strong. Someone is going to have to fill that $85 billion a month gap. And they are expected to get paid for the risks. Mortgage REITs that borrowed short and lend long will be forced to raise their rates as well or else their business will liquidate.

The housing market is going to take a big hit from the rise in the mortgage rates. Already, the May episode …read more