Former Reagan budget director warns of new housing bubble

Betsi Fores | The Daily Caller News Foundation

The market may be rising, but according to one expert, all is not well on the home front.

David Stockman, former director of the Office of Management and Budget in the Reagan administration, insists that the housing market outlook is not as cheery as some say.

“I would say we have a housing bubble … again,” Stockman told the Daily Ticker. “We don’t have a real organic sustainable recovery, because in a world of medicated money by the central bank, things aren’t what they appear to be.”
Stockman pointed to artificially low interest rates and speculation in the real-estate market as culprits.

“It’s happening in the most speculative subprime markets, where massive amounts of ‘fast money’ is rolling in to buy, to rent, on a speculative basis for a quick trade,” he said. “And as soon as they conclude prices have moved enough, they’ll be gone as fast as they came.”

Any kind of interest-rate increase will lead to a bust, Stockman said.

“As soon as the Fed has to normalize interest rates, housing prices will stop appreciating and they’ll probably head down,” he explains. “The fast money will sell as quickly as they can and the bubble will pop almost as rapidly as it’s appeared. I don’t know how many times we’re going to do this, and the only people who benefit are the top one percent – the hedge funds, the LBO funds, the fast money people who come in for a trade, make a quick buck, and move along to the next bubble.”

Two major buyers are missing from the current real estate market, according to Stockman:  first-time buyers and trade-up buyers. High unemployment and burdensome student loan debt, he said, will restrict the younger generation from entering the market.

Armed with their limited savings, the baby-boomer generation heading into retirement is more likely to trade down their homes, not up, said Stockman.

Coinciding with the potentially troubling housing market outlook is the Federal Housing Administration’s imminent taxpayer bailout.

“FHA is still in denial … but it’s a slow-motion train wreck,” Edward Pinto, visiting fellow at the American Enterprise Institute and author of studies on the housing industry, told The Daily Caller News Foundation earlier. A report last November revealed that agency was projecting a $16.3 billion loss — one that, unless agency policies changed, would require them to ask the administration for money to cover their losses.

“As my colleagues and I always say, ‘They are one recession away from a catastrophic loss to the taxpayers,’” Pinto added.

Mortgage rates rose Thursday from an average of 3.42 percent to 3.53 percent, according to Freddie Mac, the government-backed mortgage company. While it was the sharpest rise in 10 months, mortgage rates are still hovering around 30-year lows.

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