Kansas City Fed President Esther George thinks commercial real estate is in a bubble, and that bubble could force the Federal Reserve to raise interest rates. George made that revelation at an economic forum in York, Nebraska, ignored by most reporters.
"My view is that the (Fed's policy) committee should continue the gradual adjustment of moving rates higher to keep them aligned with economic activity and inflation," George told the Central Exchange in Kansas City on February 2, 2016.
George was the only member of the Fed's policy committee to vote against keeping interest rates low in March.
Kansas City Fed President Wants Interest Rate Increase
"In the long run, a failure to keep interest-rate policy in line with improving fundamentals can distort the allocation of capital toward less fruitful - or perhaps excessively risky - endeavors," George told the forum in York.
This indicates that George believes low-interest rates are creating a market bubble that will burst and hurt the entire economy at some time.
A Market Watch story on the speech indicates that George specifically mentioned commercial real estate but did not say whether housing is in a bubble. A strong possibility here is that George thinks the Fed may have to crash the real estate market to prevent a meltdown like the one in 2007.
George definitely thinks that an interest-rate increase is necessary to cool down the real estate and perhaps stock markets. She might also believe that such increases could burst some of the regional real estate bubbles like those in Denver and San Francisco.
How Interest Rate Increase would Affect Stocks
An interest-rate increase would be very bad for stocks that are heavily exposed to housing. These include homebuilders like Toll Brothers (NYSE:TOL), Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), banks that issue a lot of mortgages such as Wells Fargo (NYSE:WFC), Bank of Internet (NASDAQ:BOFI) and Bank of America (NYSE:BAC) and the home-improvement giants Home Depot (NYSE:HD) and Lowe's (NYSE:LOW).
Such a rate increase might be necessary, because the real-estate bubble has had some very negative effects on the economy. Housing prices in San Francisco are now so high, that even engineers and other tech-industry workers are getting priced out of the Bay Area.
Around 12% of San Francisco area technology workers were seeking jobs in other parts of the country, The Indeed Hiring Lab discovered. A survey by real estate agency Redfin found that one out of seven Bay-Area residents searching for property online looked outside the region.
The average rent in San Francisco in March 2016 was $4,225 a month according to SF Gate. The sky-high housing prices are beginning to damage the economy and hurt average people.
Housing Bubble Insurance is now on the Market
Homes have become such a risky investment in the United States that there is now a market for insurance designed to protect down payments.
A brokerage called ValueInsured is now selling something called +Plus, CNBC's Realty Check reported. Unlike traditional mortgage insurance, which reimburses lenders, +Plus pays the buyer up to 20% of the home's value or the down payment in case the property ends up underwater.
The policy, which lasts up to seven years, is designed to help homebuyers get at least some of their cash back if there's another real estate crash. The policies are backed by underwriter Everest Re Group Ltd., and issued through Houston International Insurance Group. The policies will also be available through New York's Amalgamated Bank.
The best way to describe this kind of product is as "housing bubble insurance." If insurers think that there is a market for it, we should be worried. It means that they think there is a real estate bubble and it is about to burst.
So yes folks, there is a real estate bubble out there, and it could burst at any time. Smart investors should get ready for it because the burst will create some great opportunities for stock and real estate speculators.