The Re-Inflated Housing Bubble - Thanks to Barack

Obama Has Re-Inflated The Housing Bubble

Posted 01/07/2014 06:43 PM ET

Subprime 2.0: It's now official: The affordable-housing policies promoted by this administration have fed another housing bubble.

Data show it started in 2011. Only question is when it will collapse.
Obama Has Re-Inflated Housing Bubble

When housing prices outpace rental costs, it raises flags. Price-to-rent ratios have risen sharply over recent quarters, mirroring the steep gain at the start of the 1997-2007 bubble.

While housing prices in real terms are still far below 2007 levels, they are back to 2003 levels.

Between 1997 and 2002, the average compound rate of growth in home prices was 6%, double the rate for rentals, American Enterprise Institute scholar Peter Wallison notes. This occurred independently of monetary policy, as the Fed over that period raised rates.

What stoked housing inflation was federal housing policies designed to boost homeownership among low-income and minority borrowers. Through the 1990s and into the 2000s, HUD required Fannie and Freddie to buy more and more high-risk mortgages.

It raised the affordable-housing quota seven times, so that by the eve of the crisis, more than 50% of their portfolios was government-mandated junk. At the same time, HUD pressured them to lower their underwriting standards. Down payments were no longer required.

In 2008 the bubble burst, wiping out trillions in wealth. Today it's forming again. Between 2011 and the third quarter of 2013, housing prices rose nearly 6% — triple the increase in rental costs, Wallison says.

"Both this bubble and the last one were caused by the government's housing policies," he said in a New York Times column that has liberals in high dudgeon.

Indeed, the same forces are at work. Ignoring the lessons of the past, Obama has reappointed many of the Clinton hands who inflated the bubble in the first place, pursuing the same misguided policies that push people into homes they can't afford in the name of "fairness."

There are new mandates aimed at getting Fannie and Freddie to take on risky borrowers. Through FHA, moreover, houses are being offered to low-income subprime buyers with minimal down payments and heavy subsidies.

Low down payments — a mere 5% at Fannie and Freddie and just 3.5% at FHA — are fueling the bubble. First-time buyers are leveraged, and many second-chance deadbeat borrowers are overleveraging. Again.

Dodd-Frank was supposed to prevent another bubble. But new qualified mortgage rules don't require a minimum down payment for borrowers in 2014. The country has been misled about "financial reform."

Look for the housing bubble to blow up when Fannie and Freddie's new regulator takes the reins of the Federal Housing Finance Agency. A long-time advocate for affordable-housing quotas, liberal Democrat Mel Watt will gut underwriting standards and fan housing prices.