The ?Yet-to-be-Named? Real Estate Bubble | Pater Tenebrarum ...

Editor's note: This is a guest post from Ramsey Su.

The country is spending more than it makes, to the tune of over $1 trillion per year for the last four years and the foreseeable future. Households are spending more to keep up a lifestyle supported by borrowed money. To treat an addict who is using borrowed money to support the drug habit, lowering the borrowing cost so the addict can buy more drugs is not the answer. We are still on drugs. That is why real estate is in a bubble. Here are the specifics:

QE~ (Infinity)

The first part of QE~ is the purchase of $45 billion of treasuries each month. To put this in perspective, the sequester in the news is $85 billion for this year and $1.2 trillion over 10 years. The sequester is less than what Bernanke finances in 2 months. Why worry about the sequester? Bernanke can just add $7 billion a month to the $45 billion and the debt would be covered.

The second part of QE~ is the purchase of $40 billion of agency MBS. The entire mortgage market is originating approximately $1.5 trillion loans per year, out of which about 70% are refinances, or $450 billion of new loan originations. Let us assume 90% of all originations are agency loans, then Bernanke is purchasing 100% of all agency originations and still has $75 billion left over, per year. Maybe he can just use that to offset the sequester.

The Fed already bought $1.2 trillion of agency MBS before QE~. The underlying mortgages are constantly prepaid via foreclosures, sales or refinances. Bernanke is replacing these prepayments with new purchases. Combined with the $40b per month under QE~, the Fed is purchasing at the rate of $16.8 billion per WEEK or $873 billion per year. Does that seem like a pretty large number to you?

Putting QEs in Perspective

Freddie, Fannie and FHA combined, by my rough estimate, should have between $5 -$6 trillion worth of loans with no big fluctuations expected in the next few years. By the first year anniversary of QE infinity, in September 2013, the Fed should have over $2 trillion agency MBS on its books. In other words, the Fed is going to own about one third of all agency MBS. Furthermore, Bernanke has openly stated that he will keep buying until the unemployment rate declines to 6.5%. Could the Fed soon end up owning the entire agency MBS portfolio?

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Source: http://www.financialsense.com/contributors/pater-tenebrarum/yet-to-be-named-real-estate-bubble

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