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Fed Taper Talk Tackles ‘Incipient’ Housing Bubbles

Daily Ticker
Fed Taper Talk Tackles ‘Incipient’ Housing Bubbles

New home construction spending rose to its highest level in almost five years in July, indicating rising rates might not be stopping some homebuilders.

But have rising rates stopped some local housing bubbles in their tracks?

Absolutely, according to Dean Baker. He says that's one piece of good news resulting from mortgage rates rising to their highest level in more than two years. The uncertainty surrounding the timing of Fed tapering means rates will likely continue to rise.

Related: Is the Housing Recovery Still On Track?

Baker, co-director of the Center for Economic & Policy Research, tells The Daily Ticker that rising rates have had a “big impact on the housing market,” but in his view “that was mostly for the positive.”

Remember, rates really started heading up when Bernanke first spoke publicly about the possibility of a Fed taper in May.

[Click here to check home loan rates in your area.]

At that time, Baker says home prices were increasing at an annual rate of 40-50% in former bubble markets like Las Vegas, Phoenix, and some areas of California. This had Baker worried that we were back in bubble territory. Now, he says we're seeing prices settling in at more normal levels and it looks to him like these “incipient bubbles have burst.” He believes it’s been a function of the rising rate environment.

Related: 'Housing Bubble' Deflated By Rising Rates

That said, how much credit does the Fed deserve for this? In June Bernanke said in a press conference that they “were a little puzzled” by the rapid sharp rise in rates. Bernanke spoke of “other factors at work” (including “optimism about the economy”) that were “larger than can be explained by a changing view of monetary policy."

Check out the video to see what Baker says to that, and also, to see what he thinks Fed policy after Bernanke will look like – particularly as speculation swirls as to what Larry Summers as chairman would mean for stimulus, rates, and growth.

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