The Federal Reserve is in the middle of a third round of bond buying that is commonly called quantitative easing (or QE3). The goal is to suppress interest rates, and it was the main monetary policy tool that the Fed began using in December 2008 to support the financial system during the credit crisis. The financial system has returned to racking up record-breaking profits, and the Fed has shifted the purpose of QE to propping up the housing system and the general economy.
By some measures though, the housing market may be showing bubble-like properties again from the broad efforts of the Fed. Rather than potentially fueling a new bubble, the Fed should turn to buying infrastructure bonds to rebuild America’s energy grid, bridges, roads, rail systems and ports. This would be a direct investment in the public sector of the nation, rather than the personal assets of households. If the Fed invested in America’s hard assets, it would create jobs and put in place the necessary framework to truly spur economic expansion.
The efforts of the Fed to prop up the housing market may be entering bubble territory in select markets (see Phoenix) as housing values rise more quickly than household incomes. From the blog Dr. Housing Bubble (emphasis mine):
The Case Shiller data is showing a steady increase in home prices across the United States. The headline figures are clear but rarely make the connection that much of this gain is coming on the back of unprecedented Federal Reserve intervention. Data is clear that household income is not making any significant gains. These gains are coming largely from added leverage produced by lower mortgage rates.
The Fed’s aggressive efforts to prop up the housing market through their purchases of mortgage-back securities (they own $933 billion) has lifted existing home sales back to their bubble-high of 2007 and helped lift housing prices. It has also given credit-worthy borrowers a chance to refinance their mortgages to lower rates and free up cash for other purchases. Although the Fed will only buy mortgage-back securities (MBS) that are guaranteed by agencies of the federal government (Fannie Mae and Freddie Mac) its intervention has trickled throughout the entire housing market.