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Will the housing market slump with increase money creation?

As I’ve said in previous articles, the huge increase in the price of housing is due to an increase of money created by the U.S. Federal Reserve and other central banks internationally. When money is created, money is spent. As additional new money comes into a given market, those prices get chased higher as sellers can select who they sell to. The more money that is created, the more opportunity for a bubble happens.

The Federal Reserve hopes that new money is spent equally in all markets — creating a soft inflation that is tamed by an increase in wages across the board. Unfortunately, markets don’t work that way. People tend to put money into the markets that are growing the best, and this cycle causes those particular markets to increase faster than the overall prices in all the markets.

The housing bubble may have been created by new money, but the idea that it could pop is still to be confirmed. Usually bubbles pop when there are no more new buyers to take over what the previous speculators bought at over-valued prices. A bubble grows as new speculators buy an item at a higher price than the previous speculators, in hopes of selling it to the next speculator in the chain. Many people are forecasting the bubble popping because demand for housing is down, yet it isn’t homeowner demand that is to blame: it is the supply of new money.

The Federal Reserve has raised interest rates over and over again over the past few years, and as rates go higher, buyers tend to cut back on loans. Yet even with higher rates of interest today over 2 years ago, the Fed is still printing new money and that money is being loaned to someone. It is where this money goes that is where he have to watch for new bubbles, or for bubbles to burst. If these groups that are still borrowing money (even at higher interest rates) think that housing still has room to grow, they may still put their money into the housing market — keeping the high price stable if not pushing it higher.

Bloomberg offers an article that believes that the housing bubble won’t pop soon: Around the Markets: Signs in U.S. reassuring for housing. They don’t talk about the newly created money streams entering the housing industry, but they believe there is still money available to enter the new housing market.

The number of homes on the market for sale is up significantly over 12 months ago, with many speculators unhappy that they can’t move their homes for a profit. Yet comparing the market today to 12 months ago isn’t an accurate way to gauge where the market will head in another 12 months, all we can watch is where the loans on newly created money will head, an judge the market at that point.

I do believe we’re seeing a huge bubble, and I believe we’ll see it pop this year mostly on the devaluation of the dollar. The Fed can prevent that by devaluing the dollar even more (increase velocity of printing new money), which could cause everything to go up in price but down in value. Without knowing the rate of the Fed’s money creation, it is very hard to gauge where to put one’s money. My bet is on gold investing, but most people want to see a rise in their investment’s value, rather than the stable value that gold tends to offer. Houses deteriorate, housing need maintenance and tax payments, insurance and care. I don’t believe a house is a good investment, except for when the Fed goes crazy with their printing presses. The dollar price of your home may go up, but has the value gone up, compared to other products you’d spend that money on?

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