Fed's actions also inflating a new housing bubble

Ed Pinto writes today in WSJ:

Over the past year, the Federal Reserve has ramped up its policy of quantitative easing, with the result being new stock market highs and surging bond prices. Moreover, housing prices jumped 8%, the biggest annual gain since 2006.

The result is that more than a trillion dollars have been added to the market value of single-family homes. Homeowners are now wealthier and according to what economists call the "wealth effect," they should be willing to spend more, helping the economy.

But there is another, less sanguine view of the housing recovery. ... A comparison of FHFA's conventional home-financing data for February 2012 and February 2013 shows that borrowers bought newly built and existing homes in 2013 for 9% and 15% more respectively than in the previous year. Increases of this magnitude cannot be attributed to higher incomes, as these rose a mere 2% over the last year, just keeping up with inflation. It appears that home prices are being levitated by quantitative easing. ...

While a housing recovery of sorts has developed, it is by no means a normal one. The government continues to go to extraordinary lengths to prop up sales by guaranteeing nearly 90% of new mortgage debt, financing half of all home purchase mortgages to buyers with zero equity at closing, driving mortgage interest rates to the lowest level in 100 years, and turning the Fed into the world's largest buyer of new mortgage debt.

This is precisely the argument that David Stockman has been making of late, as I noted in a recent blog post: increases in asset prices do not reflect real growth in the economy (as reflected by, say, "higher incomes"), but are simply the result of the Fed flooding the market with money and artificially depressing interest rates.

Ed Pinto, a fellow of the American Enterprise Institute (AEI) and one time Chief Credit Officer of Fannie Mae, is the author of the famous memorandum Triggers of the Financial Crisis, in which he demonstrates "how federal policies were directly responsible for mandating a vast increase in homeowner leverage (low or no downpayments), setting extremely high leverage levels for Fannie and Freddie, and requiring flexible underwriting standards throughout virtually the entire mortgage finance industry." Peter Wallison, a member of the Financial Crisis Inquiry Commission, based much of his Dissent from the Majority Report of the Financial Crisis Inquiry Commission on Pinto's work. In my opinion, Wallison and Pinto provide the most persuasive explanation of how the financial crisis of 2008 came to be, namely, through government manipulation of housing policies. And now Pinto is warning that once again government policies, this time in the form of massive quantitative easing undertaken by the Federal Reserve, are inflating another housing bubble.