The Federal Reserve Board’s decision to end “quantitative easing” may lead to higher new home prices. If incomes don’t rise, it could even create a second housing bubble, according to a report by Sandler O’Neill + Partners, an investment banking firm based in New York.
The report notes that home prices have advanced faster than incomes, breaking out of their historial band. “The last time this happened regulators and politicians ignored the warnings, asserting a ‘new paradigm’ supporting home ownership as interest rates and down payments declined.”
The report notes that keeping interest rates low has artificially raised home prices. The Federal Reserve Board, as part of its Comprehensive Capital Analysis and Review, is analyzing the potential impact of a 10 percent collapse in home prices over the next year and a half.