Crazy Prices!

Some people think that the recent run up in the price of a single family residence is some kind of conspiracy.

If there was a conspiracy it extended all the way up to the Federal Reserve Board because the price of a house can be demonstrated to be a function of the monthly payment (on the mortgage) and that is a function of the interest rate on a home loan. When the Fed ran the interest rates down to zero, the corresponding bond rate for a Fannie Mae loan package was also at a very low rate.

The average buyer, whether for big screen TVs, new cars, or a house makes his decision based on his ability to make the payment, not on the price.

In the final analysis price has nothing to do with the price.

Money has everything to do with the price. The cost of money, the availability of money, and the future expectations of money.

So if there was a conspiracy to drive home prices up, it was manifested by the Fed. As they drove interest rates down, they drove home prices up. I thought they just wanted to stimulate the economy!

People have written whole books on interest rates, prices, and inflation. I don't think that I can do it justice here. Suffice it to say, we have an abundance of "money" and the Fed wants to use "money supply" to control price level.

They "manipulate" interest rates as a means of controlling money supply. Right now they are raising rates in an effort to reduce inflation (which is how they refer to increases in price level). At some point they will want to stimulate the economy again and interest rates will come down.

And sooner rather than later because according to the law of unintended consequences, the higher interest rate has actually increased the money supply. Lower interest rates in Europe and Asia can't compete with our rates so all the free money flows into our banks. We have too much money. Inflation will soon follow. The only way to fix it will be to lower the interest rates again.

So what does all this mean? It means that home prices are still going to go up. Are you ready?

Crazy Prices!