The National Association of Realtors reports that sales of existing homes reached a record in April -- at an annual rate of 7.18 million sales. And the median price of a home had shot up 15.1 percent from a year earlier. That's the biggest jump since 1980. Sure looks like a bubble.
So where's the Federal Reserve when we need it?
The Fed didn't create the technology and telecom bubbles of the '90s, although it did nothing to prevent them. But the Fed undoubtedly helped inflate this housing bubble with years of record-low interest rates.
Yes, the Fed has raised short-term rates eight times since last June. But long-term rates -- which affect what mortgage lenders charge -- are now lower than they were a year ago. That's partly because the economy still has a lot of excess capacity. And if the Fed keeps raising short-term rates, the economy may stall in its tracks. This will keep long-term rates down -- which means mortgages will continue to be at bargain-basement rates. Which means the housing bubble will continue to grow.
Meanwhile, Congress -- bowing to pre–mid-term election politics -- is moving to increase the size of mortgages backed by Fannie Mae and Freddie Mac. This will mean more money for home loans, and more air in the bubble.
There's a better way to deflate the housing bubble than playing with the money supply. Does anyone remember that the Fed is supposed to regulate the banking industry? It's been asleep at this wheel.
Banks are engaged in an orgy of risky mortgage lending. Just look at the facts: More than half of all new mortgages are either interest-only loans with no down payments or adjustable-rate mortgages, whose monthly payments will rise when the economy shows more spark.
With lending standards so lax, almost anyone who can afford to pay rent can now afford to buy a house. Not just one house, often a second. Hey, why not a third while you're at it?
People figure as long as home prices keep rising by double digits, and stocks and bonds are lackluster, houses are great investments. Owning a home is the American dream. But that dream could turn into a nightmare. When everyone wants to buy something because they think someone else will pay even more for it, you can bet that eventually there's going to be a loud popping sound.
The Fed should come down hard on banks, and start right now. It should require that banks tighten up lending practices. Restrict interest-only and adjustable-rate mortgages. Make it harder to buy second or third homes.
This is the best way to take the speculative air out of the housing bubble before the bubble grows so big it may burst the economy wide open.
Robert B. Reich is co-founder of The American Prospect. A version of this column originally appeared on Marketplace.
